For the sake of global prosperity, you have to hope that the pro-growth commitments made by the visiting national leaders at Brisbane’s G20 are of a higher quality that those proposed by the host.
Laudable as the G20 goal is to boost collective growth among member countries by 2.1 per cent by 2018, it comes with a big asterix attached. There are measures whose benefits are difficult to quantify. There are measures that are contingent on the actions of others to come to fruition. There are measures whose prospects are definitely cloudy.
And then there are measures for which any claim of benefit is dubious, at best.
In this category belongs two measures the Australian Government has included in its contribution to the G20 growth goal – the introduction of a $7 co-payment for GP, pathology and diagnostic imaging services, and the deregulation of university fees. (Note of disclosure: I am currently employed by the Australian Medical Association, which is campaigning against the Government’s co-payment proposal).
It is hard to see how it can be argued that either, particularly the co-payment, will enhance growth.
Both are essentially exercises in cost-shifting – removing a liability from the Commonwealth’s books and putting it on to individuals.
In the case of the co-payment, patients face an extra $7 for each visit to their GP, while doctors are set to lose $5 from each Medicare rebate and incur extra practice costs arising from increased red tape and more patient bad debts.
In the case of university fee deregulation, an increased proportion of education costs are dumped onto students as a liability against future earnings – in effect, an increase in the tax on higher education.
Leaving aside arguments about the equity or economic efficiency of these policies, the grounds on which either could be said to contribute to growth appear weak.
It has been demonstrated that cost is a consideration for some when seeking health care, so upfront charges will discourage a proportion from seeing their GP – in fact, this was one of the Government’s explicit aims when announcing the policy.
Furthermore, though some patients might be going to see their doctor for what the Government considers to be frivolous reasons, most have legitimate health concerns.
Some of these might resolve themselves. But deterring people from seeking timely care raises the risk their health will deteriorate further and their problems become more complex, raising the likelihood of more dramatic and costlier care later on. Care in hospitals in multiple more times expensive than in a family doctor’s surgery.
Regarding university fees, it defies all that we know about price signals and human behaviour to suggest that ratcheting up university course fees will have no effect on demand.
Sure, university degrees are a sound investment in enhanced future earning capacity, so the incentive for individuals to incur larger debts for the lifelong advantage a degree confers is strong.
But as the cost of education goes up and wages growth slows, the cost-benefit equation because more finely balanced, and the weight given to other options increases – particularly from the viewpoint of someone with limited financial resources.
The Government argues that students won’t be required to begin repaying their debts until they start earning reasonable money, so any deterrence is overstated.
But even if higher fees don’t discourage many, the debts students will carry through much of their adulthood will have other significant economy-wide effects, including delaying the age at which they might begin a family or buy a house. These are major drivers of consumer spending, and by delaying or diminishing these activities, university fee deregulation will help undermine the strength of a major component of growth.
(The policy is also likely to turbocharge the brain drain, and heavily-indebted graduates increasingly look for better-paid opportunities offshore).
Prime Minister Tony Abbott said the fact that the OECD and the IMF will audit the progress of G20 countries in fulfilling their growth commitments will provide robust reassurance that the growth goal will be met.
But don’t expect the umpires to red card countries not seen to be pulling their weight.
Realpolitik means it is highly unlikely any G20 member will be marked down, especially when there are so many plausible get-out clauses and other excuses that countries can invoke.
Let’s face it, if the Australian Government can get away with calling a GP co-payment a growth measure, it is a pretty low base from which to start.
Tag Archives: G20
G20’s shaky growth base
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Joe Hockey’s G20 secret: believe
Treasurer Joe Hockey appeared to be channelling the eponymous self-help bible The Secret as he talked up the significance of the G20 summit on Sky News last Friday.
“Australians and people around the world have to believe that tomorrow is going to be better and more prosperous than today,” he told interviewer Kieran Gilbert. “Therefore, if they do believe that – if it is going to happen – then they are prepared to invest and create jobs for others in the community.”
When the G20 finance ministers and central bank governors, prodded by Hockey, declared their commitment to raise their collective GDP by more than 2 per cent the existing five-year trajectory, they appeared to be adopting the sort of “believe it, and it will happen” logic that is the The Secret’s mantra.
Their declared intention to “significantly raise global growth”, accompanied only by vague commitments to cut unemployment and increase investment, sounded suspiciously like the The Secret’s advice to “see yourself living in abundance and you will attract it. It works every time, with every person.”
There’s nothing inherently wrong with setting ambitious targets. Just ask Wayne Swan and his commitment to a return to Budget surplus in 2012-13.
But the essentially naive and ignorable nature of the commitment presided over by Hockey was neatly encapsulated in a put-down by German officials, who dismissed Australia’s initiative as a “slightly antiquated form of economic planning”.
Ouch.
The great thing about a collective commitment to something like a growth target is that everyone – and no-one – has responsibility to make it happen.
Let’s look at the wording of the relevant part of the G20 communique:
“We commit to developing new measures, in the context of maintaining fiscal sustainability and financial sector stability, to significantly raise global growth. We will develop ambitious but realistic policies with the aim to lift our collective GDP by more than 2 per cent above the trajectory implied by current policies over the coming five years.”
Plenty of wriggle room for governments there if growth doesn’t turn out as hoped – just say the financial system was too fragile to push things harder, or budget pressures were too great.
Then there is the question of how this jump in growth might be realised.
To achieve this 2 per cent acceleration, the ministers and governors said they would take steps to increase investment, lift employment and participation, enhance trade and promote competition.
All worthy goals, but tell me the government who says they won’t take steps to boost investment, employment, trade and competition. Ask most governments, and they will say that is what they are doing every day (even if they are not really).
So where did Joe get this idea for an additional 2 per cent growth target?
Have a look at the briefing prepared for the G20 meeting by International Monetary Fund staff, go right past the Executive Summary and the first 10 pages, and read the 11-page Annex at the back, which is full of worthy suggestions for stronger growth and how to achieve it.
Specifically, IMF staff have modelled the effects of what they see are necessary reforms in six key areas where policy gaps have been identified: fiscal, rebalancing (of sources of growth), labour supply, other labour market reforms, product market reforms, and infrastructure investment.
According to IMF estimates, the “policies assumed in the [plausible reform] scenario raise world real GDP by about 2.25 per cent ($US2.25 trillion) in 2018, relative to the October 2013 World Economic Outlook baseline”.
The biggest gains, the IMF believes, will come from reforms to boost competition and improve the business environment, followed by investment in public infrastructure, getting more people into the labour force, other labour market reforms and rebalancing sources of growth.
As the Lowy Institute’s Mike Callahan points out, we have been here before.
At their Toronto summit in 2010, G20 leaders committed to work together on a set of policies which the IMF estimated would boost global output by $US4 trillion and create 52 million jobs.
What happened? As we now know, the requisite policies weren’t adopted and growth fell well short of the stated mark.
As Callahan says, having a growth target and a plan to get there is only meaningful if the plan is implemented.
He points out that the necessary reforms identified by the IMF and OECD are politically challenging.
In Australia’s case, they include improving the efficiency of the tax system by lowering corporate taxes and relying more on the GST; improving the regulation of infrastructure by expanding user charges and congestion charges; improving childcare support; and reducing the stringency of the scrutiny of foreign investment. As Callahan observes, this is “tough stuff”.
The Abbott Government has already made clear that it has no appetite for taking on the sort of economic reforms that the country is screaming out for, particularly an overhaul of the tax system.
The Commonwealth is over-reliant on income taxation for revenue, and the country needs a broader tax base, of which a higher consumption tax is a key part.
Former Treasury secretary Ken Henry developed a credible and valuable blueprint for tax reform that should be the starting point for the Government.
But, just like the G20 growth commitment, it is hard to see it happening.
Even invoking The Secret won’t make it so.
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Outlier 