There Is No Such Thing As Reform Without Risks

The Australian political class has a complex, neurotic, and self-destructive relationship with the word “reform”.

On the one hand, every incentive faced by incumbent governments favours the status quo. Serious policy change is complicated and risky. Reform is easy to stuff up, it’s bound to upset interest groups, and it’s a gimme for the opposition.

It’s safer to minimally implement your election promises, relax in the comfy chair of government, and focus on distributing the benefits of office.

But on the other hand, “reform” is the gold standard of Australian politics. Journalists and historians like to see big policy changes that reshape the country, and they like to see lots of them.

Australian political legacies are a simple equation. Good governments are those that reform (Whitlam, Hawke, early Howard). Bad governments are those that squib reform (Fraser, Rudd).

This trade-off is no doubt what has preoccupied the Abbott Government over the Christmas break.

The Coalition won government by promising to be everything Labor was not: calm, austere, and rigorous. But not-being-Labor is an agenda for 12 months, not three or four terms.

Every Coalition government lives in the shadow of the Fraser government. Those press articles about “business urging reform” may be paint-by-numbers but they aren’t going to go away. (Here’s one from yesterday in the Australian Financial Review. Here’s one in the Australian today.)

The Coalition’s long-term political legacy rests on three major inquiries due to report in the next year – three inquiries that have been specifically designed to provide the Abbott Government with a reform agenda.

The Commission of Audit reports in March. The review of Australian competition policy will take 12 months once it is formed (presumably in the next couple of weeks). The financial system inquiry has been formed and will deliver its final report by November.

The Commission of Audit is obviously important to get the budget back under control. The other two ought to be big deals as well. Previous inquiries into competition policy and the financial sector fundamentally reshaped the Australian economy. Think the Hilmer Report that kick-started Keating-era National Competition Policy, and the Fraser government’s Campbell Committee which lay the foundation of financial deregulation.

Yet so far the Abbott Government’s reviews seem modest, even bashful.

The inquiry into competition policy is supposed to be “root and branch”. But its political sponsor is Bruce Billson, the Minister for Small Business, and has been sold almost entirely as a way to level the playing field between small and big business.

Competition policy ought to be about ensuring market forces have free play to drive prices down and spur innovation. However, the Coalition seems to think competition policy is about ensuring consumer prices are high enough to give farmers a “fair go”.

The Financial System Inquiry is also peculiarly insular. Joe Hockey thinks Australian banks should source more capital from within Australia. It appears the lesson the Government has taken from the Global Financial Crisis is that we are too integrated with the world economy.

This lengthy analysis in the Australian Financial Review from November suggests the inquiry will focus on developing a domestic corporate bond market. If that’s the big policy from the financial system inquiry, then the whole endeavour will have been a bit of a flop.

Indeed, a flop may be what the government is hoping for – that the results of the inquiries are managerial but not bold.

The story of the Rudd government explains why. In 2010, Ken Henry’s review into taxation gave Wayne Swan a whopping 138 separate recommendations to reform the tax and transfer system. But Swan wasn’t sure how to handle reform on such a grand scale, and ended up pursuing just one – the mining tax. We all know how that ended.

“Reform” is such a vague and ambiguous concept that any significant policy change is described as reform. For some, reform is carbon taxes and abolishing negative gearing. For others, it’s labour market deregulation and reducing green tape.

Either way, reform is presented as a good in and of itself. Every government is desperate to be seen as the Hawke government – the ideal reforming type. In part that’s because of the near universal consensus in Australia’s policy community that freeing up the economy was a great idea.

Just as significant are the Coalition’s constant reminders that they supported Labor’s liberalisations and asset sales at the time.

It’s easy to assume in hindsight that the politics of reform were relatively simple. But the 1986-1987 cabinet papers released last week underscore just how uncomfortable and bitter economic reform actually was.

Take shipping – one of the key liberalisations in the story of Australian productivity. Greg Jericho tells the story here of how the Hawke government’s desire to open up the Australian coastal trade to foreign ships was scotched by the ACTU. Shipping reform had to wait for the Howard government, for whom broken relations with the union movement was no great loss.

The hero story of the reform era that is told in the business pages every week is no more a reflection of what happened during the Hawke and Keating governments than the West Wing is of the Clinton administration.

If the Abbott Government wants the historical mantle of “reform”, it will need to take some risks. And it will need to make some enemies.