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“Picking winners” won’t work for South Australia

Governments shouldn’t pick economic “winners” but a reshaping of South Australia’s funding arrangements with the Commonwealth could help make us a leader, says Richard Blandy.

Jan 12, 2016, updated Jan 12, 2016

On December 23, 2015, Tom Richardson wrote a story in InDaily – Productive debt needed to avoid a jobless generation – about Peter Sandeman’s views on the South Australian economy.

Sandeman has a formidable background. He is a Professorial Fellow in the School of Social and Policy Studies at Flinders University.

He is also an ordained priest and deacon of the Anglican Church, and CEO of Anglicare SA.

A decade ago he was director of the State Government’s Office of the North, and is presently a board member of the State Government’s Automotive Transformation Taskforce.

Like most South Australians, Sandeman is concerned for the next generation, who, he said to Richardson, now see no future for themselves in employment.

What is the answer?

As a start, we need to be making things other people want to buy, Sandeman says in Richardson’s article.

Bang on.

However, he warns against the lure of “picking winners”, that is, identifying particular industries or companies into which to pour government funds.

Bang on, again.

As I have said in previous articles, the only process that produces winners is trial and error: to get more winners we must have more trials – start-ups.

Notwithstanding that he believes that winners can’t be picked, Sandeman expressed the hope in Richardson’s article that Governments can “know the types of infrastructure we want to bring and where our advantage might lie – picking areas of opportunity, rather than individual winners”.

Richardson’s story wound up with Sandeman hoping that the Weatherill Government’s Northern Economic Plan would provide some sort of road map to navigate a rocky road ahead.

In this regard, again on 23 December, The Advertiser carried a story by Elizabeth Henson (based on sources who requested anonymity) that the Northern Economic Plan would consist of rebadged, previously announced, projects and jobs.

Another source confirmed that no funding had been set aside for the NEP and agreed that the blueprint had no new initiatives.

Ministers’ and their minders’ views dominate what happens in the public sector, despite how expert particular public servants may be.

The most important discussions for public servants are those with ministers and their advisers whose agendas are, of course, political.

Objectives are routinely traded-off in ministerial offices across the various issues that come before each minister.

“Something for everyone” sums up the idea.

If group A loses on an issue, maybe the Government can give them a win on some other issue and retain their support.

This political process is why so many third-best solutions emerge from Government, and why the Hawke-Keating Government was such a miracle.

The systemic reason why so many decisions are (quite unnecessarily) taken by committees in the public service is to spread responsibility around.

Inter-departmental committees are often set up to iron out important issues about which there is potential disagreement between Ministers.

The deliberations of these committees are influenced by political trade-offs, as well as by technical issues. Such political compromises often lead to sub-optimal outcomes on other performance measures – like employment and output growth, for example.

The model of government that many people have in their heads as a super-rational decision-making place is wrong.

These powerful people are not subject to sufficient openness and constraint to produce the sort of government that people think they are getting.

Competition in the market-place between enterprises is a much better (and much more power-constraining) process for producing good results for the whole community than getting government to do something.

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Government lends itself to groupthink, because it is all about the wielding of power. People who offer minority opinions lose influence, however rational their opinions may be.

Groupthink results in dysfunctional decision-making and increases the chances of bad outcomes.

Extra effort is then needed on covering-up and transferring blame for failures in government actions.

As Thomas Jefferson famously said: “That government is best which governs least.” and “Dissent is the highest form of patriotism.”

To resurrect our state’s economic fortunes, South Australians must wean themselves off their long-standing belief in the beneficence of strong government.

State Government “initiatives” are incapable of leading us out of our present mess. Only our business sector can resurrect our economic fortunes by becoming serious competitors on the world stage – and that does mean without government subsidies.

We must abandon our “sook economy” desire for government support for particular enterprises.

We have many small and medium-sized firms that are already serious competitors on the word stage, despite the odds. We must make it more compelling for others to follow their example.

We should ask for a pioneering deal from the Commonwealth to run an affordable, economic policy trial in South Australia where (for five years, say):

  • Income tax rates are reduced by 10 per cent (say);
  • Capital gains tax rates are reduced by 10 per cent (say);
  • Award and minimum wages are cut by 5 per cent (say);
  • Start-up businesses are exempt from all regulations until they reach a certain size (except for environmental and health regulations);
  • Transfers from the Commonwealth to the South Australian Government are reduced commensurately so that the Commonwealth does not run an increased deficit and we are not seen by the other states as getting preferential fiscal treatment.

Such an economic policy trial will have strongly positive effects on the South Australian economy.

Output and employment will grow rapidly and unemployment will fall.

Other states will want to follow, of course, and the South Australian Government will want to consolidate or extend the arrangements.

Premier Jay Weatherill has pioneered discussion at COAG of swapping a share of GST revenue (from each State Government) for a share of income tax revenue from the Commonwealth. The proposal in this article builds on that idea and broadens it.

Commonwealth-State economic relationships should be reworked, permanently, to allow each state to choose what combination of Commonwealth taxes, GST allocation and fiscal transfers it would prefer, under an overall fiscal umbrella that is revenue neutral from the Commonwealth’s point of view.

This arrangement should be monitored by the State Grants Commission.

This reform would restore to the states a degree of economic initiative and fiscal responsibility which has been gradually lost over the past century.

Legislation should also be passed by the Commonwealth Parliament to allow a State Government to discount national wage decisions of Fair Work Australia, restoring a necessary degree of flexibility in interstate wages which has been lost over the past 40 years, reducing economic activity in the weaker State economies.

Exemptions of start-up businesses from Commonwealth regulations should be negotiated with the states as a regular part of COAG discussions.

Richard Blandy is an Adjunct Professor in the Business School at the University of South Australia.

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