Treasury was once the best and the brightest of the Australian public service, the institution that drove economic reform and had helped engineer Australia’s long run of economic growth. Now it’s a politicised policy dead zone with a growing track record of failure.
The evidence isn’t merely in Treasury’s long record of predicting wages growth that never materialises (its latest 2018-19 wages forecast of 2.5% has been revised down three times since 2016, but is still ahead of the year-to-date WPI rise of 2.3%). It has been blindsided by the collapse in economic growth in the second half of 2018: in the 2018 budget it confidently predicted 3% growth this financial year, and revised that down to 2.75% in December.
Growth to the March quarter is just 1.8% seasonally adjusted. That collapse in growth was fueled by wage stagnation and its hammering of household income, along with the impact of higher taxes under the Coalition — two factors that should have been front and centre in Treasury’s modelling, but which apparently were completely missed, or overlooked on instruction from higher up.
But Treasury’s failure extends to something more serious than getting budget forecasts wrong. The Hayne royal commission illustrated Treasury’s failures in relation to its key portfolio function of financial services regulation. That was comprehensively demonstrated by Hayne to be badly broken, leading to a colossal loss of wealth for Australians and a collapse in trust in major financial institutions. Two of Treasury’s major portfolio bodies, ASIC and APRA, emerged from the royal commission with their reputations in tatters.
And the Productivity Commission’s most recent productivity bulletin outlines an alarming collapse in productivity in Australia. It found that
[growth] in labour and multifactor productivity for the 16 industry market sector in 2017-18 was sluggish at 0.4 per cent and 0.5 per cent, respectively. This continues the recent trend of weakening productivity growth since the end of the investment phase of the mining boom in 2012-13. Labour productivity growth is well below the market sector’s long-run trend rate of 2.2 per cent per year from 1974-75 to 2017-18.
Even worse has been the slump in innovation. The PC reported:
Economy-wide capital input use increased by 1.9 per cent in 2017-18, following similar increases in the previous two years, but this was well below the historical average of 4 per cent from 1974-75 to 2017-18. This is troubling because investment typically embodies new technologies, which complement people’s skill development and innovation … Growth in R&D capital formation is even more subdued than capital formation generally, so that the R&D investment share of total investment has also fallen. The share of businesses that are innovators — which goes beyond R&D spending — is no longer growing.
The Australian economy’s productivity growth has slumped, as has our investment in innovation, despite Malcolm Turnbull’s short-lived fetishisation of it. And it took the independent Productivity Commission to call it out — Treasury was unable to.
As the putative engine room of Australian economic policymaking, Treasury — and successive treasurers Joe Hockey, Scott Morrison and Josh Frydenberg — all share responsibility for these failures. What have been the key features of economic debate at the Commonwealth level over the last six years? A very slow return to surplus in order to keep the economy ticking over, an embrace from 2015 of big increases in spending on education, health and social care, an investment in defence protectionism in South Australia and failed attempts to address energy and climate policy and cut company taxes.
The government has also boasted of its successes with preferential trade agreements, but as the PC has repeatedly noted, these are trivial to our overall economic performance.
The investment in education — particularly the Turnbull government’s brave and short-lived effort to stand up to vested interests like the Catholic church — is an important contributor to future productivity. Joe Hockey’s refusal to slash spending in 2014 and 2015 kept the economy from recession. Beyond that, it’s a poor agenda for productivity and innovation — and the US experience indicates corporate tax cuts would have actually reduced innovation further.
Part of this failure reflects the fact that the secretary for much of the last six years, John Fraser, seemed to have been frozen in amber in the early 1990s and missed any major developments in economic thinking after that — let alone issues like climate change that have emerged since then. But worse has come since his departure: Scott Morrison inserted veteran Liberal apparatchik Philip Gaetjens in to lead the department while another Liberal staffer, Simon Atkinson, was appointed deputy secretary.
The result is a Treasury that, in contrast to its role from the 1980s through to 2013, is now marginalised from economic debate. Economic debate is now led in Australia by Reserve Bank officials and the PC. Gaetjens rarely speaks in public and cannot do so without his audiences being aware of his close relationship with the Liberal Party. Treasurer Josh Frydenberg recently declared that the government was open to ideas about stimulating the economy, as if he didn’t have his own dedicated department to furnish exactly that. It was a telling moment in the decline of a once-revered and successful institution in Australian economic management.