INSTITUTE OF PUBLIC AFFAIRS

ReviewSpring 1983 — Vol.37 No.3

ISSN 0019-0268

COUNCIL OF THE INSTITUTE DIRECTOR

"SIR JAMES BALDERSTONE, (President and Chairman C. R. KEMP, B. COM.Executive Committee) CONSULTANTSSIR WILFRED BROOKES, C.B.E., D.S.O. (Past President)

HUGH M. MORGAN, (Treasurer) C. D. KEMP, C.B.E., B. COMF. M. BETHWAITEJ. D. BOOTH J. ABRAHAMI, M.A.M. D. BRIDGLAND K. BAKER, B.A.SIR LAURENCE BRODIE-HALL, C.M.G. ADMINISTRATORD. J. BRYDONJ. A. CALVERT-JONEST. MARCUS CLARK •NORMAN D. WRIGHT,SIR PETER DERHAM E.D., DIP. COM., F.C.I.S., A.A.S.A.J. D. ELLIOTT OBJECTSD. L. ELSUMSIR FRANK ESPIE, O.B.E.SIR JAMES FOOTS The Institute of Public Affairs isA. GIBSON a non-profit educationalC. B. GOODE organisation financed by businessR. KEVAN GOSPER enterprises and people throughoutSIR ANDREW GRIMWADE, C.B.E. Australia to study economic andJ. A. HANCOCK, O.B.E. industrial problems. It wasD. M. HOCKING launched in 1943. The basic aim ofSIR JOHN HOLLAND the I.P.A. is to advance the causeJ. A. LECKEYL. J. MANGAN of free business enterprise inp`DENYS I. McCULLOUGH Australia. In pursuitp suit of this aim itSIR ERIC McCLINTOCK is endeavouring:J. A. McINTOSH I. To inform the Australian publicSIR JAMES McNEILL, C.B.E. of the facts of our economic systemW. D. McPHERSON and to raise the level of economicJ. L. NAVE literacy in Australia.G. M. NIALLHILTON J. NICHOLAS, O.B.E. 2. To work always for a full andSIR IAN POTTER friend! understanding betweenfriendly gJ. W. R. PRATT employers and employees and forN. E. RENTON good relations throughout industry.NORMAN N. ROBERTSON, C.B.E. 3. To study the means by which

'PROFESSOR JOHN ROSE private business enterprise can beNORMAN W. SAVAGE, A.M. made to operate better in theR. A. SIMPSON interests of all sections of theJ. H. VALDER, C.B.E. Australian people.'HON. VERNON WILCOX, C.B.E., Q.C.

LIFE MEMBER OF I.P.A.INSTITUTE OF PUBLIC AFFAIRS

W. A. INCE, C.M.G.

Executive Committee83 William Street, Melbourne, 3000Phone 61 2029

TO OUR READERSIt is clear from letters we have received that the

`new look' I.P.A. Review initiated last year hasstruck a responsive chord.

The range of articles has been broadened andincreasing use is being made of contributors whoare noted experts in their fields.

In addition we are giving some emphasis inReview to overseas `free market" thinking anddevelopments.

In this Review we publish articles by twodistinguished overseas writers, Ken Minogue in theU.K..and Professor Wilda ysky in the U.S. Also,Washington-based Australian journalist, PeterSamuel, assesses some of President Reagan'swelfare policies.

We believe that an increasing number of peopleare feeling that many of the matters which aregiving them increasing concern are not beingadequately explored in other publications.

Along with many other issues there is the ever-increasing burden of taxes, the growth ofbureaucracy, the interference in our lives fromGovernment and special interest groups, the threatsto the family and the belittling of values which areessential for a prosperous and free society.

The aim of "Review" is to give a well-researchedpoint of view on mailers that concern us all. Theresearch report, for example, by a Melbourneactuary, John Coils, on Public Service invalidityprovides some important insights into these costlysuperannuation schemes.

In the current year we hope to increase thecirculation of Review (at present 21,000) among thewider community.

You can help us in our work, and at the sametime ensure that our views are spread more widely,by encouraging friends and acquaintances to returnthe subscription form on page 122.

Rod KempDirector

Contents100 Contributors101 Editorial: Have We Caught the

British Disease?103 Angus Jones104 Church Commissions and

Social Irres onsibilit105 Failure of African Economic

Development107 Shopping Hours: Government

Should Not Take Sides108 1.P.A. Council Changes109 The Quarter Million Dollar

Man.115 Malcolm Fraser and the Size

of Government120 Public Sector Inflation123 Anyone for Rent Control?126 Social Security and Work

Incentives129 The Seven Deadly Rigidities134 Booklet: Profits and

Employment135 Constitutional Expenditure

Limitation138 What Sort of Bill of Rights?143 Ideas and Insights146 Workfare

SUBSCRIBERADVICE Page 122

Contributed articles bynoted authorities inAustralia and overseasdealing with matters ofpublic interest are publishedin IPA Review. ThisInstitute is not necessarilyin full agreement with theviews expressed in thesearticles. They are publishedin order to stimulate freediscussion and inquiry.

99

ContributorsJacob Abrahami: A Melbourne-based economic consultant. He has lectured at

Melbourne University. His main academic interests are in the area of incomedistribution and public finance.

Dr. Robert Albon: Lecturer in public economics al the Australian NationalUniversity. Prior to joining the A.N.U. in 1976, he worked with the IndustriesAssistance Commission in Canberra. His research interests are largely in the area ofapplied microeconomics and he has published a number of scholarly articles on appliedmonetary economics, milk marketing and the rental housing market.

John Colts: A consulting actuary with Melbourne-based firm, Campbell and Cook.He is a Fellow of the Faculty of Actuaries (Edinburgh) and a Fellow of the Institute ofActuaries of Australia.

Dr. Michael James: Senior lecturer in politics at La Trobe University. Dr. James hasedited a book, "Constitutional Challenge" — a collection of readings on the AustralianConstitution and Parliamentary Practice.

Dr. Ken Minogue: A reader in political philosophy at the London School ofEconomics. He is a graduate of Sydney University and London School of Economicsand an internationally respected writer and commentator. His next book "Pure Theoryin Ideology" will be published at the end of 1983.

Peter Samuel: Special Washington correspondent, News Limited. He was formerlythe economics editor of the Canberra Times and a correspondent and columnist for TheBulletin for fifteen years.

Professor Aaron Wilda ysky: Professor of Political Science and Public Policy at theUniversity of California, Berkeley, and a member of the Drafting Committee of theNational Tax Limitation Committee. His book on "How to Limit GovernmentSpending" was published in 1980 by the University of California Press.

100 IPA Review . Spring 1983

EDITORIAL:

Have We Caught theBritish Disease?

The Keating Budget seems to have had a better reception than it deserves. On the over-riding lest of economic strategy (taken in conjunction with the Government's support offull wage indexation) it fails alarmingly.

The economy faces a continuation ofhigh inflation, on the Budget's ownestimates an increase in unemployment, ahuge expansion of public sector claims onresources, a mountainous burden oftaxes, and an increase in the alreadysuffocating extent of governmentregulations.

Largely because of the media build-up,the public has come, rightly or wrongly,to look upon Budget night as a greatoccasion. It is an occasion which shouldhave been seized upon by the Governmentnot just to give a cold and too technicalrecital of the depressing facts of theeconomic situation, but to fulfil itsresponsibility for leadership, to state whatwill be demanded of the nation if it is toextricate itself from the economic morassin which it is engulfed, and to define astrategy which at least offers a ray of hopethat the long looked-for improvement, ifnot just around the corner, will not beindefinitely postponed.

The Budget Speech did none of thesethings.

What one is entitled to expect in theopening paragraphs of a budget speech isnot just a recital of facts, which in anycase, are already well known, but arational analysis of the causes of thenation's economic dilemmas. There is noattempt at such an analysis.

The Government attempted to loadalmost the entire responsibility for oureconomic difficulties onto itspredecessors, in the process downgradingthe savage impact of a major worldrecession. There is no hint that theGovernment has reaped some benefitfrom the wages pause — which it hasunwisely abandoned before its advantagesfor the economy could be fully realised.

But, much more important, there is nomention of the two basic distortions in theeconomy which, apart from the worldrecession and the drought, are largely atthe root of our present problems. Theseare the steep growth in the "wage share"at the expense of the "profit share", andof the public sector "take" of availableresources (with its concomitant of anever-increasing tax burden) at the expenseof the productive private sector. Indeed,these two distortions will be excaberatedby the Budget and by the wage policy ofthe Government.Wrong road to recovery

For the next twelve months, theAustralian people, on the Budget's ownpredictions have little to hope for: exceptthe privilege of paying. more taxes so thatthe Government can redistribute income,according to its conceptions of socialequity, to the disadvantage mainly ofbusiness, the elderly, and the prudent whohave been so misguided as to save for

IPA Review • Spring 1983 101

their own retirement or their children'seducation, and the unemployed genuinelylooking for work. During 1983/84 thepublic sector share of the national cake isto increase to an all-time high of some 45percent, inflation is likely to remain atclose to 10 percent (U.S.A. now 2.4percent and Britain less than 5 percent)and unemployment, far from beingreduced, will rise.

The road to economic recovery is, intruth, precisely in the opposite directionto the one the Government is taking notonly through the current budget butthrough the May mini-budget, andmeasures such as wage indexation.

The Budget has given the economy afurther push down a slippery slope fromwhich we will eventually be compelled toendeavour to clamber back to the safeground of economic sanity — a taskwhich the Thatcher Government inBritain is now engaged in and which isproving to be anything but easy. In fact,Australia is now exhibiting all the signs ofhaving contracted the dreaded "BritishDisease," a disease which in the 'seventiesled Britain to be called "the sick man ofEurope." Unless we act quickly andsensibly it is by no means beyond thebounds of possibility that Australia willshortly be stigmatised as "the sick man ofAsia"."British disease"

It is worthwhile listing the mainsymptoms of the "British disease" so thatreaders can judge for themselves whetherAustralia stands in danger of beingafflicted with the same deadly illness. Forthe symptoms named below we have

drawn largely from an article written for"Review" in 1975 by Graham Hutton, aleading British economist and one-timeassistant editor of "The Economist."

A year-by-year expanding publicsectorA diminishing private sectorPunitive and increasing taxationSpread of tax evasion and avoidanceSteeply mounting charges bygovernment instrumentalitiesThe multiplication of "quangos"A swollen bureaucracy and excessivegovernment regulationIncreasing investment andemployment in the public sectorFalling or static investment andemployment in the private sectorSpecial financial privileges (i.e. pace-setter wages and salaries andretirement benefits) for publicsector employeesUneconomic labour costs extorted bypowerful monopolistic unionsIndustrial over-manningPoor profitability in the private sectorIndustries unable to competeinternationallyBallooning welfare expenditures intheir multifarious formsDeclining educational standardsAnd overall:

• double digit inflation• high unemployment• low productivity• slow or static growth

How do we make a beginning on thehuge task which confronts us and whichcannot for much longer be evaded? Whatdo we do?

Graham Hutton has given the answer inthe article referred to above.

"It consists in revising, reforming,revitalising the attitudes of the political

Australia is now exhibiting allthe signs of having contracted —the dreaded British disease.

102 IPA Review- Spring 1983

parties and publicists, employers andemployees in their organisations, and theoverwhelmingly decent and reasonablehouseholders, en masse, towards the self-respect of good workmanship, towardsself-dependence in more ways, towardsless dependence on "they" in town halls

and other public offices, towards theadvisability of good profitability in theprivate productive sector, and towardscost consciousness and economy (and,indeed, immediate reduction) in thepublic sector."

Angus Jones, C.M.G.The Council wishes to place on record its appreciation of the

services given by Mr. Angus Jones as a member of the Institute'sCouncil from 1954 to 1983.

Angus Jones, who died last August, was a member of theEditorial and Executive Committee from 1954 to 1974 andChairman of the Committee for seventeen years. He gaveoutstanding leadership in the Institute's affairs.

His considerable responsibilities as Chairman and ManagingDirector of Mobil Oil Australia Limited did not prevent him, overthis long period, from giving unstintingly of his time and energiesto the work of the Institute, and of the Executive Committee inparticular, and from maintaining a close, personal interest in theInstitute's publications.

In recognition of his contribution to the Institute he was made aLife Member of I.P.A. in 1981.

Angus, as he was affectionately known throughout Melbourne'sbusiness circles, was the possessor of an exceptionally buoyant andcheerful personality, which endeared him to his associates in theI.P.A. and beyond. More than that, his judgements on affairs wereinvariably wise and well-balanced.

He will be greatly missed by his many friends and businesscolleagues. We extend our deepest sympathy to his family.

IPA Review- Spring 1983 103

I.P.A. COMMENTARY

Church Commissions and SocialIrresponsibility

The Bishops and church leadersassociated with the recently releasedreport, "Changing Australia", shouldask some hard questions of the authors.

The Report was prepared by theAnglican Social ResponsibilitiesCommission, the Catholic Commissionfor Justice and Peace, the Commission onSocial Responsibility of the UnitingChurch, and the Australian Council ofChurches.

Take the section on unemployment.

The Report states that "The presentunemployment situation constitutes amajor crisis for the Australiancommunity".

With that we can all agree.

But the views advanced in the report onthe causes and solutions ofunemployment would leave mosteconomists, Keynesian and Friedmanite(not to mention Paul Keating and JohnHoward) gasping in disbelief.

Certainly we can all agree with theReport that the world-wide recession hasadversely affected the economy.

It is hardly credible, however, that theother main causes of unemployment are"the increased volume and movement ofcapital, the power of major banks andtransnationals, the rate of developmentand introduction of new technology andmilitarisation'.

In fact, the first three on this list -international capital, transnational

corporations and new technology — aremore likely to create employment than tohinder it.

It is not clear why militarisation ismentioned.

If the authors have in mind defencespending, it could be argued that theseoutlays, along with public sector deficits,are contributing to high interest rates,inflation and unemployment, althoughKeynesians might argue that public sectordeficits help create employment.

The true causes of unemployment, suchas the wage explosion, the decimation ofprofits, labour market rigidities (asdiscussed in Ken Minogue's article onpage 129), government taxes and chargeson the private sector, restrictiveemployment practices by unions, are noteven mentioned.

With such an extraordinarily naiveanalysis of the causes of unemployment itis hardly surprising that the suggestedsolutions are wide of the mark.

The Government, the report argues,must "move to establish control over theAustralian economy". However manyeconomists and most businessmen wouldcontend that the extent of governmentinterference and regulation of theeconomy is already proving a majorhindrance to employment-creatingenterprise.

The next main proposal is that "wemust have labour force and trainingprogrammes aimed at increasing the

104 IPA Review-Spring 1983

number of jobs". But trainingprogrammes create job-seekers not jobs.

The report then argues that we should"direct resources to those areas whereemployment can be created". At best thisproposal begs the question andmisunderstands how the labour marketworks. To direct resources to one areameans taking resources from another.There may be no net gain in employment.

Finally, the authors want new ways todistribute wealth and enable socialparticipation. They ignore the fact thatone of the chief reasons for highunemployment is the redistribution of theproceeds of industry away from profits towages which has occurred in recent years,and the high taxes associated withredistributive policies.

The closest the report gets to a realissue, that of wage restaint, is in thesentence "We must develop a social wage(housing and health especially) thatguarantees an acceptable standard ofliving .... to enable those with jobs tomaintain living standards without wageand salary increases"

But the maintenance of living standardsat a time of deep economic recession forthose in employment is at the expense ofthe living standards of workers seeking,but unable to find, employment, and of

other sections of the community.

The real trouble is that wage costs areso high that workers are being deprived ofjobs.

In fact there is not a single practicalrecommendation which would enableBishops and church leaders to have a realimpact on the unemployment debate.They have been provided by the authorswith what Paul Keating describes as "thepolitics of the warm inner glow". Manyof the sentiments in the report have longbeen discarded, even by parties of the left,in most Western countries.

In view of the very poor standard of theanalysis of the report on unemployment,the Bishops and church leaders should askthe authors:-- What economic expertise was

employed in preparing the report?— Why did the report fail completely to

address the key issue on which there isa consensus between both majorpolitical parties: the need to restoreprofitability to the private sector?

— Why did they ignore the impact ofever-increasing taxes and wage costson the capacity of private enterprise toprovide jobs?

-- Why does the report focus on largelyirrelevant issues and take anideological rather than a realistic line?

Failure of African Economic DevelopmentIn contrast with the high growth

economies in Asia, such as Taiwan, SouthKorea, Singapore, African economicdevelopment has largely been a disaster.

Since 1950 African economies south ofthe Sahara have had a lower growth rateof income per capita than all the lessdeveloped countries and, as the Table

IPA Review - Spring 1983 105

below shows, in four countries (Chad,Ghana, Senegal and Uganda) there hasbeen an actual decline in GNP per capitaover a nineteen year period.

There are two proposed solutions tothis African development crisis. Onestrategy proposal, by the Brandt Report,`North-South, Programme for Survival'emphasises the need for massiveinjections of capital from industrializedcountries. This strategy is generallysupported by international organisationssuch as the OECD and agencies associatedwith the United Nations.

But this whole approach is now beingchallenged by those who argue thatdomestic policies, and in particular awillingness to encourage privateenterprise, are key determinants ineffecting improvements in livingstandards in under-developed countries.

centralized government economicplanning, may now be coming to an end.

Dr. Healey points to a recent reportreleased by the World Bank which arguesthat the basic problem of most Africancountries was an unwillingness to usemarket mechanisms as an allocator ofresources.

"The belief has permeated AfricanGovernments and development agenciesthat physical controls can allocateresources effectively and can moveeconomies in the desired direction.

This has been associated with a belief inthe superior wisdom and efficiency oflarge-scale public enterprises inproduction and distribution over small-scale public or private enterprises".

Dr. Healey concludes, "For too longAfrica has suffered from the misery andwant induced by political ideologies. It is

For example, Australian aid expert, fervently to be hoped that a new breed of

Dr. Derek Healey of Adelaide University, African technocrats with an

argues that the whole disastrous understanding of economic relationships

experience of African socialism, which will soon put the ideologues in the dust-

includes agricultural collectivisation and bin of history".AFRICAN DEVELOPMENT HAS BEEN A DISASTER

GNP per capita GNP per capita

(SU.S.) (Average Annual Growth 016)

1990 1950-60 1960-79All Developing Countries 750(a) 2.7 3.4Africa South of the Sahara (b) 411 1.3 1.6

Chad 120 - -1.4Ethiopia 140 1.7 1.3Ghana 420 -0.4 -0.8Ivory Coast 1,150 1.5 2.4Kenya 420 0.7 2.7Malawi 230 - 2.9Nigeria 1,010 1.6 3.7Sengal 450 - -0.2Sudan 470 3.5 0.6Tanzania 260 3.7 2.3Uganda 280 0.5 -0.2Zaire 220 1.1 0.7Zambia 560 3.1 0.8Zimbabwe 630 - 0.8

(a) including China with an estimated per capita income of $230 in 1978. (b) excluding South Africa.

106 IPA Review-Spring 1983

Shopping Hours: Governments should nottake sides

Freedom of shopping hours like otherfreedoms is usually taken for granted.

That is why overseas travellers wouldbe surprised by the vigorous debate overshopping hours in Australia.

In most countries of Europe and in theU.S., detailed regulation of theAustralian variety does not exist. Theconflicts caused by political interferencewith markets are virtually non-existent.

In the U.S. Peter Samuel,correspondent for News Limited,writes:—

''The battles over thederegulation of shopping hourswere won in most States decadesago. Sabbath trading restrictionswere killed after being put toelectors in referendums.

Statutory restrictions are nowalmost unknown so shopkeepers aregenerally free to adjust theirshopping hours to the needs of thepublic. Those which do best inoffering their products when peoplewant to purchase them will thrivefinancially.

Like Australia, the movement ofwomen into the workforce has beena major impetus for the expansionof night and weekend shopping.Interestingly, one facilitating factorin shopping hours liberalisation hasbeen the generally acquiescentattitudes of labour unions.

I remember speaking to a unionofficial a year ago who told me he

had been involved in some of thecampaigns in the 1950s to continuecontrols on shopping hours. He said`It is a lost cause. People want toshop nights and weekends and ourmembers want to work. We areresponsive. We have had to adapt.We do not oppose long hoursanymore. It is work for ourmembers'."

In Paris, economist, Otto von Fieandt,says that shopping hours in Europe aredetermined more by custom thanregulation.

In Paris, he points out, food shops areopen until 7.00 p.m., but close for 2-3hours at lunch-time. Supermarketsprovide leeway for the late shopper, until9.00 p.m. or so. Non-food shops close at6.00 p.m.. A few still close at lunch-time,but the practice is diminishing.Department stores now often stay openlate (until 9.00 p.m.) one day a week.

"Saturday is a full shopping day.An additional convenience is thatindividual food shops are generallyopen on Sunday mornings and,indeed, one of the pleasures of Parisis to walk and view the colourfuldisplays of fruit, vegetables andother things set up in street stands,buy something and then adjourn forlunch.

What is true of France generallyholds for countries of Latin culture:Spain, Italy. In countries ofGermanic culture (Germany,Scandinavia), shops generally close

IPA Review - Spring 1983 107

an hour earlier, but working hoursare correspondingly shorter, so theshopper's convenience is the same."

Other countries have learnt that marketforces left to themselves are better able to

ensure satisfaction for consumers,shopkeepers and shop assistants alike.

And politicians have apparently learntthat they can avoid a lot of trouble by notsiding with one group against the others.

New Appointments to the I.P.A. CouncilThe I.P.A. is pleased to announce the following appointments to the I.P.A.

Council.

F. M. BethwaiteJ. D. BoothM. D. BridglandD. J. BrydonJ. A. Calvert-Jones

T. Marcus ClarkL. J. Mangan

J. A. McIntoshJ. W. R. PrattN. E. Renton

108 IPA Review- Spring 1983

The Quarter Million Dollar Man(...and other aspects of public service invalidity)by John Coils

The Commonwealth Government has already put into effect some significant policyinitiatives on retirement incomes, with the objective of reducing claims on the Budgetand directing assistance to those most in need. It is now time that Governments — Stateand Federal — looked at superannuation provisions in the public service, in particular atthe very high rates of invalidity retirements.

What comes to your mind as the mostlikely cause of an employee retiring with adisability benefit? A bad back? Failingeyesight? Heart trouble? Where on the listwould you expect to find mental ill-health?.

It may come as a shock to learn thatone in every two of the recent invaliditypensions under the Victorian StateSuperannuation Schemes was granted onthe grounds of 'mental illness or mentaldisorder'!

According to its Annual Report for theyear ending 30th June 1982, the StateSuperannuation Board found that mentalill-health was the primary cause of 289 outof a total of 596 retirements on invaliditypension in that year. The Board noted its`increasing concern' at the 'high incidenceof invalidity retirement' and observedthat 'measures have previously been takento reduce the number of earlyretirements.'

1980/81 1981/82

further concentration on the problem ledto a 20% increase in the total number ofinvalidity pensions granted and nosignificant change in the proportionattributed to mental causes.

The Board's concern could hardly bedescribed as misplaced. In a 1977-78survey of Australian health, the Bureau ofStatistics found that only 3% of alldisablements were caused by mentaldisorders. Even allowing for differentmeasurement criteria and instability ofthe data, there is a world of differencebetween 3°!o and 50%.Youth invalidity

More telling still perhaps is an analysisof the proportion of mental ill-healthpensioners to all invalidity pensionerswithin specific age-bands. The followingtable illustrates the point:

Age at New mental ill- health pensionersretirement to all new invalidity pensioners

Those measures will take time to worktheir way through the system, but omensare not good. A year earlier the Board,highlighting 1980-81 statistics of 248mental ill-health cases among a total of499 new invalidity pensioners, had been'very concerned with this increasing trend(towards retirement on grounds of mentalill-health or disorder).' Thus, one year's

Under 30 50 5I30-39 74 6640-49 55 6350-59 41 35

60 and over 0 20

Thus, not only is mental disturbancerife in the Victorian public service, itsincidence is concentrated markedly at theyounger ages.

IPA Review . Spring 1983 109

The capital cost to thetaxpayer of supporting a 35year old for the rest of hisworking life can be aroundone quarter of a milliondollars.

The Commonwealth SuperannuationScheme, in common with public sectorschemes in many parts of the world, has areputation for high rates of mentaldisorder as the primary cause ofinvalidity. Interestingly, the incidence ofsuch disorders by age is very different, asthe next table shows. This relates only to`mental' invalidity pensioners andanalyses them by age.

Age at Percentage of new mentalretirement ill-health pensioners in

each age-bandC'weaIIh Victoria(1980-81) (1980-81) (1981-82)

Up to 49 26.1 56.5 64.7

50-54 18.1 22.5 17.3

55-59 34.7 21.0 17.0

60-64 21.1 0.0 1.0

100.0 100.0 100.0

It is difficult to escape the conclusionthat some mentally-disabling factor isrampant in Victoria, striking down itspublic servants in their prime, whilstleaving their Commonwealthcounterparts relatively unscathed. Morethan one in three of the Victorian casesrelated to a person under age 40.

The capital cost to the taxpayer of, say,supporting for the rest of his or herworking lifetime a thirty-five year oldteacher is around one quarter of a milliondollars. Thus, if there is any abuse of thesystem, the cost to the community rapidlyassumes a frightening size.

The table reveals another feature of the

Victorian experience. This is the award ofinvalidity pensions, irrespective of cause,at younger ages than occurs in theCommonwealth Scheme. The analogoustable is:-

Age at Percentage of all new Invalidityretirement pensioners In each age-band

C'wealth Victoria(1980-81) (1980-81) (1981-82)

Up to 49 21.7 46.5 50.250-54 16.8 24.6 18.455-59 36.3 27.7 28.960-64 25.2 1.2 2.5

100.0 100.0 100.0

So what is going on in the Victorianpublic service? Left to its own devices, isthe State Superannuation Board likely toget its house in order? Its track-record isnot encouraging. In their most recentreport the joint actuaries to the Boardrefer to the progression of ill-healthretirement rates during the twenty years to1980. Measured against the experience inthe early 1960s as a base (of 100%), thisshows a rate, for the bulk of themembership, of 154% by 1974, 199% by1977 and 230% by 1980. The pattern hasattracted regular comment but preciouslittle success in reversing the trend. Forexample, quoting from the actuarialreport of the position as at 30th June,1977, "there would seem to be a `primafacie' case for an amendment to the StateSuperannuation Act which would restoreearlier patterns of ill-health retirement ...the scheme, as it is presently designed,appears to encourage people to retire onthe grounds of ill-health ... the pension onill-health retirement ... is 70% of salary,inflation-proofed."

Tighter medical procedures on entry tothe Scheme have been introduced to weedout new members with impairments at theoutset and hence disqualify them from

11 0 IPA Review. Spring 1983

some of the range of pension benefits. Indue course this may work its way throughinto fewer qualifiers for ill-healthpensions.Too much leniency

The more urgent problem, however,would seem to be to address the apparentleniency with which claims fromprospective pensioners are treated. TheState Superannuation Board used tocomplain that, having once granted apension, it had very little flexibility underthe existing Acts to modify the terms orlevel of the pension. For example, an ill-health pension, once awarded, could bereduced or cancelled only if the pensioner(having been assessed as fit for duty)again took up employment within theambit of the State SuperannuationScheme, refused an offer of suchemployment, or continually refused topresent himself for medical examination.Any job outside this range, no matter howdemanding or well-paid, had no effect onthe pension.

Some fifty percent ofCommonwealth publicservice retirements are ongrounds of invalidity.

Some action was eventually taken onthis issue in a 1981 Act, extending theassessment to a capacity for any gainfulemployment.

At the time of writing there is littleevidence available as to the success ofthese measures. They do not themselvesguarantee success: success will come onlyif they are enforced vigorously. Forexample, the Commonwealth Scheme haswide powers to review invalidity pensionsbut, quoting from a recent report by theCommissioner: `(pressures of other work

made it) necessary ... to suspend thereview of invalidity pensioners for sixmonths ... reviews were then re-commenced on a limited basis.'

In May 1982 the Victorian StateSuperannuation Board 'adopted thepolicy that where it was considered that apension should be reduced (under thisprovision), the salary from otheremployment together with the reducedpension would equate to five-sixths of thecurrent equivalent salary of the positionfrom which the pensioner retired.' Such apolicy, if accurately summarised in theAnnual Report, seems to pose as manyquestions as it answers.

Suppose a pensioner accepts a job andhas his pension reduced as above. If hewere subsequently retrenched, by now ingood health, would his pension revert toits former level? The policy above suggestthat it would, in which case the originalinvalidity pension has effectively beentransformed into an unemploymentbenefit.

To get the Victorian performance intoperspective it is useful to look further atthe Commonwealth Scheme and to lookalso at the corresponding scheme in SouthAustralia. The comparisons are bothrevealing and disturbing.Private fund experience

The overall rates of ill-health retirementused in valuations of the CommonwealthScheme nearly doubled between 1972 and1980. The actual rates experienced sincethe Commonwealth Scheme was modifiedin 1976 have been higher for the most partthan in the Victorian State Scheme. In1980-81, however, the rates fell backsharply, prompting a comment by theAustralian Government Actuary that the'reduction was due at least partly to

IPA Review - Spring 1983 111

changed procedures by some employers.'

In a private sector fund exitson health grounds areoutnumbered by those on agegrounds by six to one!.

Nonetheless, even in that year 50o ofall new retirement pensions were ongrounds of invalidity. Two years earlierthe figure had been nearly 75%. At 30thJune, 1981 the Commonwealth Schemehad over 22,500 pensioners classified asinvalidity retirements, compared withonly 18,000 'age' pensioners.

The consistent experience of a majorprivate sector fund in recent years hasbeen that exits on health grounds areoutnumbered by those on age grounds byat least six to one. The contrast withCommonwealth Scheme experience,mentioned above, is obvious.

At 30th June 1982 the Victorian StateScheme had some 13,100 `age' pensionersand some 5,700 `ill-health' pensioners,which at first sight is a surprisingdistribution relative to the correspondingfigures for the Commonwealth Scheme.This ratio is, however, very sensitive tothe treatment of pensioners in the age-band from 60 to 64 years. The tablesabove show that 'ill-health' classificationof pensioners in Victoria virtually ceasesat age 60, in contrast to Commonwealth(and private sector) practice. Clearly thisleads to a relative understatement of 'ill-health' pensioners in Victoria, boostinginstead the numbers of `age' pensioners.

In South Australia the picture isdifferent. The incidence of mentaldisorders is not apparent from the dataavailable. The overall ill-health retirementrates from 1976-80 were some 20o upfrom their levels in 1974-77, but even so

were scarcely more than half of theVictorian rates of the correspondingperiod. Unlike the Commonwealth andVictorian schemes, there is little financialadvantage to the member to haveretirement classified as `ill-health.' SouthAustralia has (June 1980) six times more`age' than 'invalidity' pensioners. TheSouth Australian actuary also urges on hispublic service colleagues `mechanisms forcontrolling Government superannuationcosts', whereby the true cost ofsuperannuation has a direct impact ondepartmental budgets.

Thus, some strong evidence emergesthat high rates of ill-health retirement inVictoria are linked to members' attitudes,unrealistic medical assessment, poorbenefit design and poor budgetarycontrol. Indeed, the VictorianGovernment Actuary is on record asechoing these sentiments.

What of the position in the privatesector, where there is no taxpayer waitingto pick up the ultimate bill fordisablement benefits? Not surprisinglythere is evidence of tighter financialcontrol and hence ill-health retirementrates which are substantially lower than inthe public sector. They do show, however,a similar marked upward trend during thelast twenty years. This -- in the publicsector as well as in the privatepresumably reflects gradual changes incommunity attitudes, especially topsychiatric illnesses.

As a general rule, in the private sector,the insurance market's concept ofdisablement governs the outcome of anyinvidividual's claim for ill-healthretirement. Obviously each insurer in acompetitive market has a keen interest inmaking his premium rates as attractive aspossible. This in turn implies close

112 IPA Review- Spring 1983

scrutiny of claims and trends.

Similar scrutiny applies to matters ofbenefit design (for the same underlyingfinancial reasons) to remove any incentiveto `milk the system.' A striking exampleof the need for such an approach occurredsome years ago with the fund of a majorAustralian manufacturing company. Aspate of early retirements in ill-health wastraced to an anomaly in benefit designwhereby a much larger benefit resultedfrom ill-health retirement. The benefitstructure was changed and ill-healthretirements reverted to `normal.'What constitutes normal?

Any comparison of private and publicsector experience must address thequestion of what constitutes `normal.'For example, a neurotic teacher orpoliceman in the Victorian public servicewill likely qualify for an invaliditypension on the grounds of inability to dothat job effectively. By contrast, a similarperson having similar problems in theprivate sector is far more likely to beencouraged to resign or to move to a lessstressful job. The question of aninvalidity benefit would rarely arise,except perhaps where early retirement onage grounds was already a possibility.

There must be an incentive towork, not to seek invaliditypensions.

In the first case, the erstwhile publicservant is added to the `ill-health'statistics; in the latter, the addition, ifany, is probably to the `resignation'statistics. The large range of jobsavailable in the public service at State orCommonwealth level suggests that itshould be comparatively easy (relative towhat most private employers could offer)to place the public servant suffering stress

in a less-demanding job. The individualcan then continue to use his talentsproductively and the taxpayer is savedmany thousands of dollars in unnecessarybenefit payments.

What is surely undeniable is that thetaxpayer should not have to support, bymeans of a generous, indexed, life-timepension, a young or middle-aged personwhose only `disability' is to have made apoor choice of career. The argument isreinforced many times over if that persongains substantial employment elsewhereyet continues to accept the pension. Theissue then is almost one of fraudulentmisappropriation of taxpayers' funds.The solution

What is the solution? In a moralclimate where enormous resources arebeing devoted to `tax avoidance' and`medifraud,' an appeal to the betternature of public servants to cease abuse ofthe system may fall on deaf ears. Therealistic solution, widely-recognised butinsufficiently acted upon, is to remove theincentive for abuse.

This needs co-ordinated action onseveral fronts. First, the design of benefitswithin the scheme must be sound. Theremust be an incentive to work, not anincentive to seek invalidity benefits. Forexample, a `stress' pension (payable onlyif no other work were available) might bebased on service completed and excludepotential, future service.

Next, there must be a consistentapproach to the medical assessment ofcases, pitched at a level which recognisesattitudes in the community as a whole.Some onus might usefully be placed oninvalid pensioners by making it obligatoryfor them to advise the scheme'sadministrators on taking up any

IPA Review - Spring 1983 113

substantial level of employment, withheavy sanctions for non-compliance.

The only real problem inreducing the appallinginvalidity rates is one ofpolitical will.

Thirdly, there must be budgetarycontrol such that it is in the self-interest ofthe employer to ensure that unjustifiedclaims for benefit are rejected.Ultimately, perhaps, this is the mostpowerful sanction. It is, of course, exactlythe constraint under which any privatesector concern must operate. Too often inthe public service the financial buck canbe passed on. If a departmental official

had to deal with an invalidity pensioner ascapital outlay of, say, $250,000 within histotal budget allowance, some newattitudes might emerge, as to bothtreatment of claims and redeployment ofstaff.

A Victorian Parliamentary Committeeis conducting a wide-ranging enquiry intopublic sector superannuation schemes.But an enquiry is not needed to deal withthe high invalidity retirement rates.

The real problem has been the lack ofpolitical will. How long will politiciansallow the current insupportable rates tocontinue? How long will it take for theresponsible public service authorities toensure the scheme operates more in linewith community norms?

114 IPA Review i Spring 1983

Malcolm Fraser and the Sizeof Government

A number of political theorists have argued that the powers of special interests meanthat Government will continue to increase its share of the community's resources. Therecord of the Fraser Government suggests that the theorists may have been toopessimistic; government spending can be held in check, although substantial andsustained reductions will need a much more thorough-going programme than was putbefore the people in 1975.

* *The problems that President Reagan

and Prime Minister Thatcher are havingin holding down public sector spendinghave lent some support to those `publicchoice' scholars who argue thatdemocracy is biased towards theinexorable growth of government.

The bias arises from the fact thatbenefits of government action for thosewho receive subsidies and privileges areconcentrated while the costs are diffusedamong the great body of taxpayers.Therefore special interests have a strongermotivation to urge governments to spendthan taxpayers have to defend theirdisposable incomes from each additionalincrement of taxation.

While those interests which have thegreatest opportunities to advancethemselves in this way are public sectorinstitutions, the theory also applies toprivate sector interests who seek specialbenefits from government.

Like the Thatcher and ReaganAdministrations the Fraser Governmentcame into office with a general mandateto stop and ultimately reverse the growthof government.

The seven years of the FraserGovernment present a useful case study toassess in general terms, the predictions ofthe `public choice' scholars.

There is no definitive measure of thesize of government. Certainly the FraserGovernment did not specify, apart from a

,rr * titcommitment to reduce the deficit, whichmeasure, or set of measures, was mostappropriate.

This is in contrast to the U.S., forexample, where President Reagan in hiselection campaign argued that a keymeasure of his policies to cut governmentwould be the share of the Federal Budgetin the GDP.

In table 1, eleven measures relevant tothe size of government have been listed.

If the Reagan view isaccepted that the essentialmeasure is budget outlays as ashare of GDP, the FraserGovernment demonstratedmoderate success.

If the Reagan view is accepted that theessential measure is budget outlays as ashare of GDP, the Fraser Governmentdemonstrated moderate success. Whilefluctuating between years, the share ofbudget outlays in GDP at the end of theFraser period was almost the same aswhen Fraser first came to power

It follows, however, that as there wasno sustained reduction in the Budgetshare of the community's resources therewas clearly no reduction in the absolutesize of government; indeed it grew alongwith the economy

While international comparisons are

IPA Review • spring 193 115

difficult — not the least because ofdiffering economic conditions andpolitical responsibilities — it appears thatthe Fraser Government was moresuccessful then either the Reagan orThatcher Governments (to date) inexpenditure control.

In the U.S., central government budgetoutlays increased from 22.4 percent to25.2 percent of GNP (3 budgets) underthe Reagan administration, while underthe Thatcher Government thecomparative figures show a rise from 36.7percent to 40.7 percent (4 budgets).

Outlays(Table 1, columns I to 3).Overall, the growth in budget outlays

during the Fraser years was held to anaverage annual rate of 2.1 percent (real);this compares with an average annual realrate of 5 percent in the 'sixties and 10percent in the Whitlam years.

In Mr. Hawke's first budget theforecast is for a 7.2 percent real increasein outlays.

Overall, the share of theCommonwealth outlays in GDP. in1982/83 totalled just over 30 percent -about the same level as at the end of theWhitlam years.

The comparatively low growth inoutlays in the Fraser budgets, combinedwith the improving economicperformance up to 1980, meant that theobjective of reducing the CommonwealthGovernment share of communityresources was achieved (columns 2 and 3).But these reductions could not besustained with the sharp increase in socialwelfare outlays occasioned by therecession.

The increase in outlays in the firstHawke budget pushed the Common-wealth share of GDP to an estimated 31.6percent.

Budget Receipts(Table 1, column 4).A less favourable measure of the Fraser

years was the growth in budget receipts(mainly taxation) as measured by theirshare in GDP, rising from 25.1 percent in1975/76 to 27.2 percent in 1982/83. Thisgrowth reflects the priority given toreducing the deficit and inability tofurther reduce the level of governmentspending.

The Hawke Government's acceptanceof deficit financing, together with theforecast upsurge in GDP growth, are themain reasons why the share of receipts inrelation to GDP is expected to fall slightlyin the first Labor budget.Deficits

(Table 1, columns 5 to 9)One of the main objectives the Fraser

Government established for itself was theelimination of the Commonwealth deficit.By this criterion, up to 1981, it achievedsubstantial success.

The deficit fell substantially duringmost of the Fraser years. The low growthin expenditure, combined with some taxincreases, enabled the budget to bebrought into virtual balance by 1981/82.

The blowout in the final budgetrepresented 2.8 percent of GDP which,according to figures published in the Julyedition of The Journal of EconomicAffairs, would still leave Australia withone of the smallest deficits (relatively)among major industrial countries.

The Hawke budget deficit of $8.4billion represents some 4.7 percent ofGDP.

An important achievement of theFraser Government was to reduce the`structural imbalance' in the budget. Thestructural deficit is defined as the deficitnet of the recession-induced effects, suchas the increase in unemployment benefits

116 IPA Review= Spring 1983

TABLE IGROWTH OF COMMONWEALTH GOVERNMENT

UNDER WHITLAM, FRASER AND HAWKE

YEAR REAL INCREASE BIWGEr MUM BUDGET ARD BUDGET BUDGET DEFICIT STEIUCY11RRl STRUCTURAL TOTAL BUDGET CONM INWEAlil CC MBUWLAIYNIII BUDGET OF GOP RONBUOGET RECEIPTS DEFICIT SHARE OF DEFICIT' DEFICIT SHARE' AND N0N GOVBUE*Epf GOTEMNMEIRTOURAYS I%Y SHARE OF SHARE OF INTO GOP (SM) OF GOP BUDGET EMPLOYMENT =WARE UP THE

GOP GDP I%I (NI DEFICIT i 1NIN) I%1 SHARE GF (%I

GOP I%1GOVERNMENT 1 2 3 4 5 6 7 9 9 tG II

1973/74 5.6 23.8 24.6 23.3 279 0.5 716 1.4 0.7 368 6.3

WHITLA M 1974/75 19.8 28.9 29.4 24.8 2545 4.1 2781 4.5 4.1 385 6.4

1975/76 5.1 30.0 30.6 25.1 3567 4.9 3659 5.0 4.8 400 6.6

1976/77 - 0.8 29.0 30.3 25.7 2719 3.3 2048 2.5 3.6 388 6.4

1977/78 2.4 29.6 31.1 25.9 3311 3.7 2481 2.7 4.3 389 6.1

FRASER 1978/79 1.7 28.4 29.5 25.0 3457 3.4 3036 3.0 3.5 399 6.3

1979/80 - 0.5 27.6 28.9 25.8 2034 1.8 595 0.5 2.1 395 6.1

1980/81 4.0 27.7 28.9 26.9 1109 0.8 ( 456) (0.3) 1.1 400 6.0

1981/82 1.9 27.9 29.3 27.6 548 0.4 (1766) (1.2) 0.7 404 6.0

1982/83 6.3 30.4 31.8 27.7 4473 2.8 ( 807) (0.5) 3.2 407 5.9

HAWKE 1983/84(est.) 7.2 31.6 33.2 27.0 8361 4.7 2616 1.5 - 420 6.0

Sources: Columns. (1) (2) (3) (4) (5) (6) (9) 1983/84 Budget Paper Number!(7) (8) R. Blandy and S. Creigh Australian Bulletin of Labour June 1983(10) (11) Australian Bureau of Statistics Cat. Nos. 6203, 6214, various issues

"figures in brackets denote surplus

0

us

9

V

and reductions in tax revenue as a resultof the recession. In other words, thestructural deficit represents the size of thedeficit if full employment were achieved.

A less favourable measure ofthe Fraser years was thegrowth in tax and otherbudget receipts.Richard Blandy and Stephen Creigh in theJune, 1983, edition of "The AustralianBulletin of Labour" argue, "The(structural) component of the budgetdeficit as a percentage of GDP has notbeen large in recent years compared withthe Whitlam Budgets of the middle 1970,swhen the structural deficit reached 5percent of GDP. The projected structuraldeficit for 1983/84 is not large bycomparison with these years — althoughit is large by comparison with the last fourFraser Budgets.

The Budget Papers indicated that thestructural component of the deficit willincrease substantially, both relative to the'overall deficit and to GDP, in the firstHawke Budget.Size of the Public Service

(Table 1, columns 10 and 11).

In contrast to the current policies of theCommonwealth and a number of StateGovernments, the Fraser Governmentmaintained tight controls on public sectoremployment.

Commonwealth Governmentemployment grew by only 1 percentduring the whole period of the FraserGovernment — a rise of some 3,300employees (after adjusting for transfer ofemployees between State andCommonwealth Governments — seenote, Table 2). As a share of theworkforce, Commonwealth Governmentemployment fell from 6.6 percent to 5.9percent.

By contrast, the State Governmentsduring this period significantly increasedpublic sector numbers; between 1975 and1983, the total number employed in theStates' public sector rose from 885,000 to1,013,500— a rise of 14.5 percent.

This year CommonwealthGovernment employment isforecast to grow by 4 percent— far more than the totalgrowth of the Fraser years.

In the current financial yearCommonwealth Governmentemployment is forecast to rise by about 4percent — far more than the total growthduring the whole of the Fraser period.

Table 2State Government Employees

1975 1983 °'o growth(Nov.) (March)

(000's)

N.S.W. 300.8 336.7 11.9Vic. 230.9 275.0 19.1QId. 133.5 157.1 17.7S.A. 93.7 99.5 6.2W.A. 93.3 109.3 17.1Tas. 32.9 35.9 9.1Total 885.1 1013.5 14.5

'Note: In order to ensure comparability thesefigures have been adjusted for the Commonwealthtake over in 1978 of the railway operations of theTasmanian and South Australian Governments, andfor the transfer of Commonwealth Governmentemployees to the Northern Territory Government in1978.

The Last Fraser BudgetThe 1982/83 budget is frequently seen

as a break from the tough fiscal stance ofthe previous years of the FraserAdministration.

When presented to Parliament the1982/83 budget showed a real increase inoutlays of some 2.6 percent, an overall

118 IPA Review . Spring 1983

deficit of $1,674 million and a domesticsurplus of $230 million.

The comparative 'outturn' figures are:outlays growth 6.3 percent, overall deficit$4,473 million and domestic deficit $2,482million. About half of the increase inoutlays over the original budget estimatescan be attributed to the lower economicactivity which caused the upsurge in socialwelfare payments, and the additionalneed for drought and bushfire relief. Inaddition, the outlays were increased by anumber of discretionary decisions.

Revenue collections for 1982/83 werealmost $900 million below the budgetestimate largely as a result of lowereconomic activity. The explosion in thedeficit therefore was in large part due torecession-induced effects rather than adramatic loosening of fiscal discipline.The First Hawke Budget

In contrast to 1982/83 when GDPacutally fell, the current budget has beenpredicated on a significant recovery ineconomic activity. Despite this morefavourable economic climate the share ofthe Commonwealth budget in- theeconomy has gone on to a much higherplateau. The 7.2 percent real growth inoutlays is the largest expansion since1974/75. In contrast to the previous year,a significant part of this expansion seemsto be due to Governmental decisionsrather than as a consequence of therecession.Conclusion

There is no doubt that the movetowards smaller government must bebased on a more detailed politicalprogramme than the Fraser Government

possessed when it came to office. Inretrospect, it is clear that two importantelements in any programme to reducegovernment and improve thecompetitiveness of the private sector —'privatisation' and deregulation — hardlyformed any part of the initial programmeof the Fraser Government in 1975.

If the public sector's share ofresources is going to bereduced, future governmentswill have to broaden theirbase of advice instead of totalreliance on the public service.

If the public sector's share of resourcesis going to be reduced, futuregovernments will probably have tobroaden their base of advice away from,instead of near total reliance on, thepublic service. It is hardly likely that thepublic sector will produce the optionsnecessary to permit the move towardssmall government. A wider base of advicewould also help Ministers avoid the trapof becoming spokesmen for the interestsof the public service.

The experience of the Fraser yearsindicates that, where there is political will,it is possible for government to withstandthe immense pressure from the publicservice and lobby groups to increase theirshare of community resources. The factthat the share of government was heldduring a period of poor (world-wide)economic performance underscores thisparticular achievement.

IPA Review - Spring 1983 119

Public Sector Inflationby Jacob Abrahami

The price increases imposed by Federal and State Governments in their recent Budgetson a range of goods are yet to be reflected in published consumer price indexes. Yet evenbefore the latest range of imposts were announced, it was clear that Governments andtheir authorities have been far less disciplined in restraining prices than the privatesector. * * * * *

There is one area of pricing whereGovernments generally have clearauthority to act — public sector pricesand charges.

In addition, Government policies canhave a significant effect — often themajor effect — on prices of some goodsproduced in the private sector. Forexample, Government taxes and excisesmake up over 50 percent of the price ofcigarettes, beer, spirits and motor fuel.

As the chart below shows, in the pastthree years the private sector has managedto contain prices more successfully thanthe public sector. In the period September1980 to June I983, public sector pricesrose on average by 42 percent, privatesector prices rose by only 28 percent.

In order to measure this relative impactof Government policies on consumerprices, two indexes have been calculated,based on Australian Bureau of Statisticsdata. One is for goods and services whereprices are determined mainly by the publicsector and the other for goods andservices where prices are determinedmainly in the market place.

Privately supplied items covered by theindex are food, clothing, private housing,household equipment, private motoring,personal care products and services,recreation and education.

Public sector items include local

government rates and charges, fuel andlight, postal and telephone services,public housing, motoring charges andhealth services.

Automotive fuels, tobacco and alcoholhave been included as public sector goods.While these goods are privately producedand distributed, as mentioned above atleast 50 percent of their price to theconsumer is made up of various taxes andcharges (with spirits it is as high as 70percent); for some of these itemsgovernment actually determines theminimum or maximum price. In addition,governments have served notice that theyintend to raise additional revenues byincreasing taxes on these items.Private Sector Price Trends

Why have the private sector price risesbeen more restrained than the publicsector?

1980 to 1983 has been a period of themost severe recession in the post-war era.Despite the low level of economic activitythere has been considerable pressure forhigher wages. Private sector supplierswho operate in a competitive environmenthave had to absorb much of the costincreases. This is reflected in the profitshare of GDP during the period; in1980/81 the profits of trading enterprisesaccounted for an historically low 14.8percent of GDP. By 1982/83 the profitshare had fallen further to 12.4% — thelowest in at least 25 years.

i20 IPA Review - Spring 1983

Public sector suppliers are generallymonopolists in their fields, and as suchare not subject to the disciplines of themarket place. In the absence ofcompetitive pressures, public authoritieshave little incentive to resist wagepressures, with the inevitable consequenceof higher costs which are passed on toconsumers.

Thus, in recent years, the publicmonopolies which supply consumers with

their energy needs have been grantingsignificant wage increases withoutcorresponding productivity increases. Theresult has been an increase of 51 percentin the price of energy in the past 33months. In contrast, clothingmanufacturers, who have to competeagainst imports, have recorded only a 20percent increase during the same period.

A growing source of pressure on theprices of publicly provided goods is the

Public and Private Inflation

140

130

120

Private Sector Items

FoodClothingPrivate HousingHousehold EquipmentPersonal Care Productsand Services

Recreation

EducationPrivate motoring

Public Sector ItemsLocal Rates andChargesFuelLightPostal ServicesTelephone ServicesPublic HousingMotoring ChargesHealth ServicesAutomotive FuelsTobaccoAlcoholPublic Transport

PublicSector

(13.6% pa.)

All Items(10.6% pa.)

/ Privatei Sector

i (9.4% p.a.)

ii

i

110

L100

SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN

1980 1981 1982 1983

IPA Review - Spring 1983 121

increasing use of government pricingpolicies as a means of general revenueraising. In Victoria, for example, the Gasand Fuel Corporation and the StateElectricity Commission must pay apercentage of gross revenue to the StateGovernment irrespective of theprofitability of the enterprise. To raise thenecessary tax revenue, public authoritiesseem to find it easier to raise their pricesrather than improve their productivity.

Public authority pricing policies shouldreflect efficient costs of production. Theproblem at present is that there are noeffective market controls to encourageefficiency. As a result, the price increaseswhich are occurring reflect the ability ofunions and governments to exploit themonopoly position of these enterprises.

The need to raise revenue also helpsexplain the large increases inCommonwealth and State budgets intaxes, excise and charges on consumergoods such as cigarettes, wine, beer andmotor fuel.

There is no doubt that public sectorspending has "taken off" with theFederal and most State Governmentspursuing big spending policies. This willlead to further pressure on public sectorprices, as governments seek additionalrevenue sources.

The contribution of the public sector tooverall inflation is, in fact, greater thanthe graph suggests. Many of the priceincreases in the private sector result fromGovernment policies on such matters aspayroll taxes, energy pricing, land taxesand company tax.

Finally, the Government support forindexing wages and salaries will clearlyadd pressure on the price levels of allgoods and services.

The combined effect of automaticindexation and rising prices may putAustralia, once again, on a costly wage-price inflation spiral, with the publicsector leading the way.

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122 IPA Review - Spring 1983

Anyone for Rent Control?by Dr. Robert Albon

The Victorian Government has recently employed consultants to assess the likelyimpact of changes it proposes to make to its landlord and tenant legislation, theResidential Tenancies Act of 1980. There is reason to believe the existing legislation isalready causing damage in the rental housing market and that the direction of theproposed change is the wrong one.

* * * it

Rental market regulation -- as opposedto old-fashioned "rent control" — is aphenomenon of the 1970s and 1980s. ItsAustralian origins lie with theCommission of Inquiry into Poverty (theHenderson Report) and the growth of theconsumer protectionist movement. Quiteclearly, advocates of this kind ofinterference in the private rental marketsee it simply as another branch of`consumer protectionism. Rental housingis one of many products where consumersare susceptible to falling prey toavaricious traders.

The Henderson Commission wasclearly not in favour of "rent control"which it rejected for three reasons:

• landlords will 'have a clearincentive to get rid of their tenants';

• rent control `can lead to landlordsattempting to cut costs by not spendingmoney on maintenance'; and

• 'even more serious is the overalleffect of a sharp reduction in thesupply of rental accommodation'.

The Commission concluded that 'we donot agree that rent control is in the long-term interest of tenants.

The Commission also maintained 'thatthe market mechanism does operates,with imperfections for private rentalhousing, and suggests that 'many of theproblems of low income private rentersresult from their low incomes'. However,

the Commission also noted that:•The cheap private rental market has

many other unsatisfactory aspects suchas insecurity of tenure, illegal retentionof bond money, biased leases, andlegislation which gives tenants fewlegal rights.

Here lies the germ of 'rental marketregulation in Australia.' The legalreforms suggested in the report of theHenderson Commission involve settingup in each State a Residential TenanciesBoard and a Tenancy InvestigationBureau. These bodies would be vestedwith the full complement of regulatorypowers.

The Commission's proposals attractedconsiderable support from severalquarters.

New South Wales was the first State toact. Eviction provisions were tightened upconsiderably in 1977 such that a courtorder was necessary to effect an evictionwhether a lease was current or not. Heavypenalties for illegal evictions wereincluded. The New South Wales Landlordand Tenant (Rental Bonds) Act, 1977, setup a Rental Bonds Board to administerthe security bond system.

South Australia also acted early and itslegislation, the Residential Tenancies Act,1978, conforms quite closely to theHenderson model and carries over rent-setting powers from the former Excessive

iPA Review- Spring 1983 123

— Payment of rents in advance.— The frequency and notice requiredfor rent increases.— The reasons and time periodrequired for notices to vacate premises.— The possibility of abolishing' bondsand instituting an insurance scheme(the subject of a separate feasibilitystudy).— Regulation of rents found to be inexcess of market levels for comparableproperties.— The establishment of a rentalhousing code.— Standard form leases."The intention seems to be to amend the

1980 Act in such a way as to increase theseverity of the controls in all directions.The Cost of Interference

This type of interference in the rentalhousing market can be attacked as a clearviolation of private property rights.However, it is worth pointing out thatwhile being pro-tenant in intent it maywell be anti-tenant in effect. This was thebasic message of an analysis of . rentalmarket regulation by Professor, RossParish of Monash University.* ProfessorParish pointed out that the benefits totenants are not a free good, as theyinvolve costs to landlords. Theseadditional costs will tend to drive up rentsand cause some landlords to wish to exitthe market. Parish argues that the costs tolandlords will exceed the tenant benefits— if not, the legislative provisions wouldhave automatically found their way into

has only recently arranged for an While being pro-tenant inevalulation of the likely effects of the g pproposed changes. According to the intent it may well be anti-Government's study brief, areas "which tenant in effect.are likely to be relevant for this studyinclude: If the upwards pressure on rents isR. M. Parish, "The Economic Effects of Victoria's Residential Tenancies Bill. ' in R. P. A lbon (ed.). RentControl: Costs and Consequences. Centre for Independent Studies, Readings 2, Sydney 1980, Ch. 12.

Rents Act. A Residential TenanciesTribunal was established to adjudicate ondisputes between landlord and tenantsand to set rents — if desired by the tenant.The size of bonds was limited to amaximum of three weeks rent, bondmoney had to be deposited with theTribunal, and eviction controls weretightened up.

This type of interference inthe rental housing market canbe attacked as a clearviolation of private propertyrights.

In Victoria a Community Committeeon Tenancy Reform reported in 1978, butit was not until 1980 that the Bill wasfinally enacted as the ResidentialTenancies Act. In this form the Act wasconsiderably different to that envisagedby the Community Committee andencapsulated in the 1978 version of thebill. Tenant interests seemed to feel thatthey had been betrayed and there weremumblings of discontent about theoutcome. Prior to the 1982 VictorianElection, the Labor Party released itspolicy on the matter of landlord andtenant law. The policy envisaged majorchanges, especially in regard to evictionprovisions, fair rents and the securitybond system.

The election victory of the Labor Partyin 1982 paved the way for enactment ofthe Labor policy. However, theGovernment has t d h :ino move a ystl and private contracts.

124 IPA Review - Spring 1983

suppressed by application of the rentcontrols proposed the situation willbecome even more difficult for manytenants as more and more landlords willattempt to exit the market. Many of thosewishing to withdraw their properties willbe frustrated by the severe evictioncontrols contemplated. Some of thesecaptured by the legislation may attempt toreduce costs by cutting maintenance,although this could be thwarted by thecompulsory repair requirements.

Old-fashioned "rent control"is almost an inevitableoutcome of the controls beingproposed.

These natural reactions of propertyowners will give rise to demands for

tougher regulations on evictions, rentsand repair requirements, setting off avicious circle of increaslingly more severecontrols. Old-fashioned "rent control" isan almost inevitable outcome of thisprocess. However, there are fewcommentators who would view thisprospect as desirable for either landlordsor tenants.

If "reformers" really wish to helptenants there are effective ways of doingthis. One obvious way which arises out ofthe previous discussion is to free up theregulation of the rental housing market soas to encourage landlords to supply andmaintain accommodation. Lower costswould also be attainable by relaxation ofstrict zoning and building regulationswhich burden the building industry forlittle offsetting benefit. Indeed, tenantscan only lose from such controls whichultimately raise rents and restrict choice.

SYMPOSIUM ON THE FREE SOCIETYto be held on Sat. 5th and Sun. 6th November at

Macquarie University, 9.30 a.m. to 5.30 p.m.

The seminar will be held by the Adam Smith Club and Australians for CommonSense, Freedom and Responsibility.

Speakers include: Professor H. Arndt, Ken Baxter, Professor I. Chipman,Professor Mark Cooray, John Hyde, Professor D. Kemp, Greg Lindsay, AlexSimpson, Edward St. John Q.C. and John Wheeldon.

The organsiers of the Symposium believe:

— that the free society is under threat

— that the future of our free society depends on halting and reversing the threatto private property, freedom of contract, freedom of trade and enterprise,freedom of movement of capital and labour.

Contact: The Adam Smith ClubP.O. Box 92St. Leonards N.S.W. 2065 TELEPHONE: (02) 438 4377

IPA Review. Spring 1983 125

Social Security and Work IncentivesThe effect of social security payments on individual behaviour, work incentives, and

ultimately the potential output of the economy, has so far not been a significant part ofthe welfare debate in Australia. This article looks at some of the questions involved.

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Welfare lobbies, which have been fairlysuccessful in setting the agenda for publicdebate in Australia on social securitymatters, tend to argue that the workdisincentive effects of social securitypayments are marginal. Furthermore,given the severe recession, it is suggestedthat any incentive for some people towithdraw from the workforce has thebeneficial effect of making way for thosewho wish to work. The real issue, theysay, is that pension and benefit levels aretoo low.

However, it cannot be taken forgranted that the monetary incentivesinherent in a welfare system do not have asignificant effect on an individual'sbehaviour. If social security payments(together with associated fringe benefits)are sufficiently attractive, individuals maywell consider a welfare rather than a workoption. This can lead to increasingnumbers of people choosing the welfareoption, particularly if eligibility criteriaare not sufficiently tight.

Should this occur, the potential outputof the economy can be reduced, which inturn, would limit the community'scapacity to provide adequately for thereally needy.Exodus of older males

A dramatic indication of how socialsecurity provisions can affect a choicebetween welfare and work is given in an

article published last year by Dr. WilliamMerrilees of the University of Sydney*.

He attributes the "mass exodus" ofolder males from the workforce largely tochanges in the social security system.

In the 55-59 age group some 90 percentof all males were in the workforce in 1970.By 1980 the participation rate had failedto 80 percent. Among the 60-64 agegroups the drop was even more striking -from 77 percent to 50 percent.

If social security paymentsare sufficiently attractive,individuals may well considera welfare rather than a workoption.

He argues that these changes werecaused by improvements in the real levelof pensions, easier eligibility for invalidpensions, and, for the older group,greater reliance on the wives' old agepension and increased use of war servicepensions.

Professor Gruen and Ms. Gallagher inan article published in the July "CurrentAffairs Bulletin" also point out that animprovement in social welfare benefitscan have a fairly substantial effect onboth the number claiming benefits and theeconomic behaviour of applicants.

W. J. Merrilees. "The Mass Exodus of Older Males from The Labour Force" Australian Bulletin of Labour.March 1982.

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An example quoted in their articleillustrates the effects the supportingparent benefit could have on workparticipation.Supporting parent benefit

The pension paid to a single parent withone child is approximately $5,000 perannum. But, if she chooses to work, thesupporting mother in the ACT wouldneed to earn over $12,000 to be as well offas she would on a supporting parentbenefit.

The gap between the $5,000 and$12,000 arises from the fringe benefitsreceived, such as rental and other rebates,and the extra costs of being inemployment.

The writers state that "if this example isat all typical, roughly one-third of femalefull-time employees would earn less thanthe full benefits they would gain asrecipients of a single parent benefit."

It is hardly surprising to read,therefore, in a study issued by theCommonwealth Department of SocialSecurity (Research Paper No. 18) that"experience in other countries shows thathigher rates (of workforce participationfor sole parents) are possible".

--. one third of female full -time employees would earnless than the full benefitsavailable to sole parents.

The supporting parent benefit is one ofthe fastest growing sections of the welfarebudget. In 1983/84 it is estimated that justunder 164,000 supporting parents andtheir dependants will receive $893 million.Unemployment benefit

The potential work disincentive effectsdo not only apply to the accessibility ofinvalid pensions and supporting parentbenefits. The national secretary of theAdministrative and Clerical Officers, Mr.Paul Munro, was recently quoted in thepress as stating that about 50,000employees (as a Class I Clerk) would bealmost as well off on unemploymentbenefits.

Public servants at this level have a grosssalary of $12,500 a year. A married manwith one child may be left with a take-home pay of less than $321 a fortnight(after tax, superannuation, hospitalbenefits and transport costs).

The same man on unemploymentbenefits would receive $298 a fortnight

MAKING UP THE $7,000 GAP

$ per annumRental rebate in A.C.T. government housing ............. 1,869Electricityrebate ................................... 40Telephone rebate . ........................ ..... .. 35Value of Pensioner Health Benefit Card

(i.e. cost of health insurance for approximately the samecoverage as the pensioner health benefit cards) .......... 1,000

Extra full-time child-care costs ........................ 2,500Extra taxation (after allowing for the 1982/83

sole parent tax rebate of $713) ...................... 1,600$7,044

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(after the recent budget increases) as wellas free medical costs and other fringebenefits.

Does it matter, in a period of highunemployment, if the social securitysystem tends to discourage work effort?

In reference to the exodus of the oldermales from the workforce Dr. Merrileesstates "the economic problems of a slowlygrowing workforce supporting a rapidlygrowing reserve of dependents in theforthcoming decades will be exacerbatedby the trend to early retirement."

On the other hand, he argues that thedecline in the participation of older maleshas made "a tidy contribution" to ourunemployment problem.

Professor Gruen, however, argues thathigher benefits and reduced workparticipation rates are not easily orquickly reversible if and when theeconomy moves closer to its potentialoutput.Reducing output

Even if the economy remains slack, thewithdrawal of older people from theworkforce could reduce output. To theextent that these people form part of thegrowing numbers of self-employed in theworkforce, their early retirement wouldnot create a job opportunity for anunemployed person and would reduceoutput.

This analysis suggests a number ofconclusions.

First, in considering the real level ofbenefits it is necessary to take intoaccount both the basic monetary level ofthe benefit and the attendant fringebenefits. In the example quoted in thisarticle, the fringe benefits available to thesupporting mother (including the rental

rebate) would total some $37 per week.This represents an addition of almost 45percent to the basic pension rate. Much ofthe poverty analysis in Australia ignoresthe value of fringe benefits.

The issue of workdisincentives deserves farmore serious examinationthan it is getting.

Second, it is clearly essential forgovernments to consider the workdisincentive effects when the levels ofsocial security payments and `add on"fringe benefits are established. Certainlythe mass exodus of older males from theworkforce was not predicted.

Third, a policy to raise the base level ofpension may well require a tightening ofeligibility criteria and more careful benefitdesign. This would ensure that some ofthe work disincentives are minimized andthat the improved benefits areconcentrated on those most in need.Income or asset tests are only one aspectof eligibility. The medical criteria onwhich invalidity and sickness benefits aregranted, for example, may also need to beexamined.

Finally, if there are substantial workdisincentive effects in the welfare system,they can cause inequities between thosewho work and those who, by choice,decide on the welfare option. As the taxburden increases it must exacerbatedivisions in the community.

Of course, even after consideration ofthese matters, decisions by governmentson pension levels may not be altered. Butit is hard not to agree with ProfessorGruen that the issue of work disincentivesdeserves far more serious examinationand adminstrative attention than it isgetting.

128 IPA Review - Spring 1983

The Seven Deadly Rigiditiesby Dr. Ken Minogue

In her battle to restore the British economy, Mrs. Thatcher is facing what Dr.Minogue calls 'the seven deadly rigidities'. The institutional pressures whichcomplicate the task of economic management in the U.K. are in many ways similar tothose facing Mr. Hawke and Mr. Keating.

Economic policy necessarily dependsupon the nature of the society affected bythe policy decisions. The axioms ofeconomics assume a perfectresponsiveness in the actions of producersand consumers. In other words, economicvariables are assumed to be flexible, butin fact there are, to a greater or lesserdegree, rigidities which prevent a cause ineconomics from having its predictedeffects.

We may well stigmatize as badwhatever seems to stand in the way of theenergies of 55 million people, who areboth energetic and inventive. The Britishdisease is institutional sclerosis. I shallconsider seven rigidities which standbetween Mrs. Thatcher's policy ofmonetarism on the one hand, and anexpanding economy on the other.One: union monopolies

The first rigidity is the union monopolyof labour, which affects many industries.In taking on a worker, an employer is nolonger entering into a contract whoseterms depend upon mutual convenience,but rather creating a status whose termsare often difficult to predict (they are, forexample, often changed by governmentallegislation) and whose termination mayinvolve the employer in protracted andexpensive hearings before industrialtribunals. Such an employer will find itdifficult to pay the employee his worth,because he is increasingly constrained byunion-negotiated wages, appropriate to

varying grades and unaffected by the skillor dedication of the worker.

If in responding to changes in demandor in technology, the employer seeks toget rid of some of! his workers, or even tochange their duties, he must againnegotiate with a union whose entire raisond' etre is to force advantages from him atthe point of a strike. In the worst cases,such as printing workers in Fleet Street,there is not merely gross overmanning,but jobs which are entirely a matter ofhistorical fantasy, since advancingtechnology has rendered them entirelyunnecessary.

Those who benefit from"feather- bedding" are highlyvocal; those who pay for itare not organized.

It is part of Mrs. Thatcher's policy thatlabour which is unprofitably immured inthese union-created interstices of theBritish economy should be shaken outonto the unemployment market and thusforced to confront reality. But this is apolitically dangerous line of policy, sincethose who benefit from this kind offeather-bedding (as it is called in theU.S.A.) are highly vocal and specific,while those who suffer from it (the buyersof newspapers, for example) who mustpay excessively for what they get, are notorganized and, in an economy riddledwith such costs, barely notice one rather

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than another.

In a situation of this kind, it is hardlysurprising that employers should thinktwice before hiring labour, since eachemployee brings with him such a lot oftiresome problems even before he hasmade any contribution to the output ofthe firm.

Two: wages cannot be reducedThe second rigidity consists in the level

of wages which are in many areas keptinflated by a mixture of union pressureand government regulation. That there isa trade-off between higher wages and thelevel of unemployment has recentlybecome much more evident to manyworkers, but this does not mean that theywill automatically choose a lower wageand higher level of employment.

in Britain, wages are mostlystandardized in each industry, and eachunion keeps an eagle eye oncomparabilities, so that a rise hereinevitably sparks off demands there. Forlong decades, Britain has been caught in along-playing drama in which the firstmove is a campaign to raise the wages of"the lower paid" — sometimes absurdlydefined as those on anything less than theaverage wage — and the second move is ademand by skilled workers to restore thedifferential between the wages of theskilled and unskilled. The fundamentalpoint is that the wages are standardized,and that they can always go up, but neverdown. And that point illustrates one ofthe crucial features of these rigidities.Given that wages are totally inelasticdownwards, then excess wages extractedby the threat of strikes or other pressures,ought to be paid for in bankruptcies. Butthis only happens if all the other featuresof the economy remain rigid.

If wages were lower,unemployment would belower.

The commoner solution is that inflationchanges the context, or overseascompetitors are discouraged fromcompeting, or the exchange rate responds:something other than wages must give,since a decrease in wages is one of theunthinkabilities of British life, as it is,indeed, of life in most industrializedcountries. Thus when it becomes clear (assuccessive governments have proclaimed)that there must be a cut in the standard ofliving, this never takes the form of areduction in wages. It most commonlytakes the form of wages failing to keep upwith inflation.

The case of wages thus allows us toobserve one of the interesting unrealitieswhich effects all discussions of theproblem. There is much talk of anabsolute rigidity called "unemployment"and no concern with the fact thatunemployment occurs at a fixed price oflabour. If wages were lower,unemployment would also be lower. Andalso, as we shall see, unemploymentdepends upon widespread attitudes to thejobs workers are prepared to take.Three: expanding bureaucracies

The third rigidity is the bureaucracy.This is the nasty sociological word forwhat the British call civil servants. Weneed not doubt that administrators standbetween us and chaos; if they must beseen as producers, then what theyproduced, in general, is order, and thememory enshrined in records. Actuallycivil servants do a great deal more, ofcourse: they collect tax, make customsexaminations, run computers etc.

The problem is that there is in principle

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no limit to the amount of administrationwe can use. How much information needsto be collected if we are to make a sounddecision? How many records need to bekept? How many checks should aprocedure incorporate? The lateNorthcote Parkinson grasped thisproblem from the other end byformulating his famous law that workexpands to fill the time available. Heformulated the law on observing that thenumber of administrators needed by theBritish Admiralty seem to expand ininverse proportion to the number of shipsthey had to look after.

Now it happens that the bureaucracyplays an important part in one of the lessimplausible explanations of the Britishdisease. This particular explanationsuggests that every time a recession intrading conditions made some workersunemployed, the government stimulatedthe economy, with the result that thepublic sector, and especially the local andcentral government bureaucracy, took onmore workers. The economy breathed outproductive workers, as it were, andbreathed in bureaucrats.

The administrators needed bythe Admiralty seem to expandin inverse proportion to thenumber of ships.

This process was bound in time tocreate problems, because once installed injobs in the public sector, workers becamemuch more difficult to shift. They thusturned into another of those rigidities Iam describing. And as the unions steadilyturned a job into a status, so it becamemuch more difficult to cut thebureaucracy. The whole experienceconstitutes an interesting cautionary talefor other countries, because it is clear that

there are in-built mechanisms preventingthe slimming down of obesebureaucracies. For one thing, theplanning required for slimming down abureaucracy must be done by some partof the bureaucracy itself, so that theinstitution is required to perform a kindof self-mutilation.

Bureaucrats tend to cut any serviceexcept themselves unless they are veryclosely controlled. And these few `apriori' observations find support in thefact that inability to make any seriousdent in the number of civil servants is oneof the more notable failures of theThatcher government. Other governmentsought therefore to be warned that themost dangerous of all growths is that of abureaucracy based on a tenured career-structure.Four: weight of regulation

The fourth rigidity lies in the weight ofgovernment pressure and regulation ofthe economy. Many such regulations arewell-intentioned, and they may wellremind us that a society without any ofthe "rigidities" I am discussing mighthave intolerable features. Suchregulations include environmentalregulations, the outputs of inspectorates,and regulations about sexual and racialequality.

In some cases, such as the requirementthat firms of an appropriate size mustemploy a proportion of handicappedworkers, these regulations amount to anoff-loading of what are taken to be publicresponsibilities on to industrial firms. Theends are often desirable, but the ease withwhich a desirability can be imposed bygovernment upon others who must paythe costs makes it a device conspicuouslyopen to abuse. In all cases, regulation is toproduction what a handicap is to the riderof a race.

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Five: power of the public sectorThe fifth rigidity is the public sector as

a whole. This particular rigidityintroduces us to one of the underlyingparadoxes of the contemporary situation:that the more powerful an agency, theweaker it becomes. States are unlikely togo bankrupt: they can usually find themoney to pay their employees fromsomewhere; at worse, they can printsome; and recently, that is exactly whatthey have been doing. This veryresourcefulness of powerful governments,their very flexibility, creates the rigidity ofemployees in industries owned largely ortotally by the government.

Bureaucrats tend to cut anyservices except themselves.

All through this century, the Briti