Ideas@TheCentre – The Centre for Independent Studies

Ideas@TheCentre

Ideas@TheCentre brings you ammunition for conversations around the table.  3 short articles from CIS researchers emailed every Friday on the issues of the week.

A deficit of stability and predictability

14 September 2012

What started as an admirable economic goal has become an obsession. Treasurer Wayne Swan is once again hinting at tweaking the dials of fiscal policy to remain on track for a 2012/13 budget surplus.

He was right to insist on this in the budget just four months ago, although it must be added that the ‘surplus’ he tabled then was so slender that it was for all intents and purposes a balanced budget. Governments routinely behave as though they can steer the budget to whatever bottom line result they choose, but the reality is that once budget policies are determined the bottom line is hostage to unforeseen shifts in what are termed ‘parameters’ in budget-speak – variables such as commodity export prices and aggregate employment that help determine revenue. In the last four months, parameter shifts have made a budget surplus harder to achieve.

One lesson for the Gillard government is that if it wanted a high probability of achieving a surplus, it needed to aim much higher in the May budget. The surplus then budgeted, at a mere $1.5 billion, made the actual achievement of a surplus a 50/50 prospect at best, given the range of possible parameter outcomes. As parameter shifts appear to have been adverse, the question Swan faces is whether to tweak the policy dials again to restore a tiny surplus in the mid-year budget review due in November.

The narrow macroeconomic assessment of that question is one thing, and is complex in itself. Whatever the macroeconomic answer is, policymakers must appreciate that within a broader framework the budget is much more than its bottom line result. It is a maze of tax and expenditure policies, the quality of which – within reason – trumps the bottom line in economic importance. Poor quality tax and expenditure policies will do much more harm than a small deficit. The end does not justify the means. The goal of achieving a surplus does not justify every budget measure that goes in that direction.

One aspect of quality is the stability, predictability and sustainability of policies. Tinkering with tax policies has been elevated to new heights in recent years. The company tax rate, for example, was to be cut by 2%, then by 1%, then not at all, and then maybe but only if a committee could find a way for the business sector to pay for it by relinquishing existing concessions. Another example is provided by the farcical changeability of superannuation tax policy, which has become Swan’s first port of call for extra revenue to add to his tally of ‘savings’ every six months. In the arena of carbon pricing and taxing, the policy backflips are well known.

Some tax policies were damaging in their first iteration, but the chopping and changing has added another layer of hurt to confidence and stability. Economic life is full of uncertainty, but there is unavoidable and avoidable uncertainty. Proper application of the rule of law takes away the avoidable uncertainty. A stable, predictable tax regime is more important than whether the budget is a few billion in surplus or deficit. It would be a good thing if this government and its predecessors had devoted more energy to making existing spending more effective, rolling out fewer new spending initiatives, and managing overall spending to a level that can be sustained with an efficient, stable and predictable tax system. Past failures of this test are water under the bridge, but it is a test that should be applied in the future. In making a wafer-thin budget surplus in 2012/13 a symbol of the government’s economic management credibility, Swan is obsessed with the wrong thing.

Robert Carling is a Senior Fellow at The Centre for Independent Studies.

Literacy gaps exist and socio-economic status

14 September 2012

As a result of the Gonski report and the recent budget cuts to NSW schools, the relative quality and importance of non-government schools to education in Australia has again been questioned.

The most recent issue of the journal Australian Economic Papers has an article by Paul Miller and Derby Voon comparing the performance of government and non-government schools in the NAPLAN (National Assessment Program for Literacy and Numeracy) tests.

The objective of Miller and Voon’s analysis was to determine the extent to which differences in performance between school sectors can be attributed to the different characteristics of their students, including socio-economic status and gender. Their article builds upon other published research papers that use data from the Longitudinal Surveys of Australian Youth (LSAY) and the Programme of International Student Assessment (PISA). The majority of these studies find that socio-economic status does not completely explain school sector differences.

Miller and Voon estimate and compare the contribution of socio-economic status to NAPLAN performance in the different sectors. They find that for Year 3 students, the main effect of socio-economic status is similar in each sector and in each aspect of the NAPLAN tests (approximate r2 = 0.3, a figure that corresponds with the strength of the relationship found between socio-economic status and student performance over the last several decades). The picture changes in high school, however. Among Year 9 students, the impact of socio-economic status is significantly higher in independent schools than in Catholic or government schools.

Overall, the results support the findings of Gary Marks’ studies – the superior test results of non-government schools cannot be fully accounted for by the higher average socio-economic status of their students. There is a ‘moderate value-added effect’ of a school sector once student intake characteristics are controlled.

One limitation of Miller and Voon’s study is that it does not account for the prior ability levels of students. It is well known that literacy gaps exist between students of differing socio-economic status when they begin school. It is therefore likely that students in schools with a lower average socio-economic status have started school with lower literacy levels than their more advantaged counterparts. A similar study comparing the growth in scores between NAPLAN tests in years 3 to 5 and years 7 to 9 would be instructive.

Jennifer Buckingham is a Research Fellow at The Centre for Independent Studies.

Flexibility rhetoric ignores common law contracts

14 September 2012

It is important that politicians, business leaders and commentators have a grasp of the facts before making brash statements about broken systems and agitating for policy change. This is particularly important in an area as politically polarised as industrial relations. The public need to be properly informed about all the relevant facts if they are to be convinced of the need for reform.

For example, John Howard said recently that industrial relations reform, particularly individual contracts, needs to be put back on the policy agenda. Howard’s statements are legitimate and that debate needs to be revisited. What is not helpful, however, is MPs making ignorant statements that omit important facts.

Liberal MP Steven Ciobo said the current situation was ‘lunacy,’ that it was ‘absurd’ for Labor to say, ‘Employers and employees should not be allowed to have individual contracts.’ What Ciobo is implying here is that under the current industrial framework, there is no provision whatsoever for individual contracts. This is simply not true.

Individual contracts do exist. ABS statistics on forms of employment showed that in 2010, 37% of the workforce is covered by them. In fact, they are the most common form of employment contract in the private sector.

These agreements are the old common law contracts. They are individual in nature, are unregistered, and have existed since long before the labour market reforms of the 1990s and 2000s. It is true that the Fair Work Act got rid of the Howard-era statutory individual contracts, but it did not make common law contracts ‘illegal,’ as Ciobo implies.

Such irresponsible statements exaggerating the degree of inflexibility in the labour market hamper an honest debate about labour market flexibility, an important debate to have in the current industrial climate.

Common law contracts play an important part in the flexibility of our current system. They are quite popular in non-unionised industries and areas where labour is highly skilled – such as finance and law.

Moreover, common law contracts were far more important for labour market flexibility than the statutory agreements of the Howard era. Common law contracts have accounted for at least 30% of the workforce over the last decade, while Howard’s agreements never accounted for more than 3% of the Australian workforce, even under WorkChoices when the reforms were supposed to make them more appealing for employers.

Labour market reform needs to be debated, and reintroducing statutory individual contracts needs to be considered, but misleading statements about labour market (in)flexibility only serve to damage the public discourse.

Alexander Philipatos is a Policy Analyst at The Centre for Independent Studies.