We owe more than we realise to our best econocrats

If you believe, as all of us do, that governments need to be accountable to the voters who elect them, then someone has to care about the way those governments account for all the money they raise in taxes and charges, plus all the money they borrow. Governments spend this money on myriad services they provide and the huge array of infrastructure they build for us, ranging from police stations to grand spaghetti junctions.

Our politicians are meant to care about how – and how well – money is raised and spent, but the control of all that money and the recording of where it comes from and goes to is the responsibility of bureaucrats in federal and state treasuries and finance departments, not forgetting the central bank.

The budgets and financial statements they produce are intended to account publicly for all the money that passes through the governments’ hands, but the econocrats know that the system of accounting must also help ensure that governments and their departments and agencies are well managed. That the money they spend actually achieves its intended objectives, with little waste.

Whereas political journalists spend much of their time talking to the politicians we read about, as an economic journalist, I spend most time talking to the technocrats standing in the shadows behind them.

The pollies are never keen for the econocrats to take much of the media limelight, and that usually suits the bureaucrats fine. But while they all work hard in the voters’ interests, some of them do an outstanding job in protecting and advancing those interests.

One such person was Percy Allan, who died at 78 last month. He was secretary of the NSW Treasury for about 12 years under three premiers – Labor’s Neville Wran, the Liberals’ Nick Greiner and Labor’s Bob Carr. Allan was a contact of mine who later became a friend.

You may think of economists and accountants as being as boring as the work they do. But that’s not the way they think of themselves, and no one who knew Allan ever thought of him as dull.

As we were reminded during the pandemic, whereas the federal government raises most of the taxation, it’s the state governments that are responsible for delivering most of the government services we rely on.

The six states and two territories have much autonomy. They compete against and copy each other. But usually, it’s the biggest states, NSW and Victoria, that initiate change.

If you want boring, try this: Allan led the way in getting federal and state governments to adopt the accounting profession’s general accounting principles and also the public sector’s budget reporting and financial statistics standards.

It helps make governments’ budgets and financial statements more accountable and transparent if all governments follow the same set of rules, rather than them each doing things their own way. And for the rules to make sense.

Governments provide many figures for publication by the Australian Bureau of Statistics. It helps if those figures are calculated on the same, consistent basis, and if government figures fit with all the statistics provided to the bureau by the private sector.

Similarly, it helps if all the world’s governments use the same internationally agreed standards laid down by the International Monetary Fund and the United Nations Statistical Commission.

Private businesses have long been required to report their annual profit or loss, and their balance sheet of assets and liabilities on the last day of the year, on an “accrual” basis. That is, to make a great effort to ensure that the income reported for a particular period was earned during that period.

Likewise, to ensure the expenses reported for the period didn’t relate to other periods. Accountants call this making sure the income and expenses reported for a period actually “match”.

If that sounds obvious, it wasn’t the way federal and state government budgets and financial statements were prepared until Allan and others led the way in conforming to private sector and international accounting and statistical standards.

Until then, federal and state budgets and financial statements were calculated on a “cash” rather than accrual basis. Revenue was any money that hit the government’s bank account during the period, even if some of the money was people paying last year’s tax late or others paying next year’s early. Similarly, all money that left the government’s bank account during the year was counted regardless of the year to which it applied.

Has the penny dropped yet? Compared to the cash basis, the accrual basis makes it much harder for the company or the government to fudge their annual figures by switching incomings and outgoings between years.

Now get this. The federal government has used accrual accounting since the start of this century. But to this day, federal budget documents are written in a confusing mixture of the two accounting languages – cash and accrual. The budget deficit or surplus the treasurer tells us about is always the “underlying cash” balance.

Treasury will tell you cash is the more appropriate basis from a macroeconomic perspective. That is, when you want to judge the budget’s effect on the economy, or the economy’s effect on the budget.

Maybe. But what’s undeniably true is that, unlike the states, the feds’ retention of the cash basis makes it a lot easier for the government of the day to engage in creative accounting – which it often does.

Another reform Allan was proud of was the “corporatisation” of various businesses the state government owns: the railways, the buses, water and sewerage, electricity generation and distribution, the ports and so forth.

Allan wanted all government-owned businesses to run, and be accounted for, as though they were commercial undertakings. When so many of them are natural monopolies, this has its dangers.

But when state-owned businesses aren’t run like businesses, they’ll tend to be run for the convenience of employees rather than customers, with overstaffing and other wastefulness.

So, better to have transparent accounting, leading to greater efficiency and higher profits going back to the government, to be spent on additional services without the need for higher taxes.

Linked to this was Allan’s role, during the term of the reforming Greiner government, in setting up the NSW Independent Pricing and Regulatory Tribunal to ensure the prices charged by government-owned businesses rose by no more than could be justified.

But one of Allan’s greatest achievements was achieved long after he’d left NSW Treasury. He founded and ran the Evidence Based Policy Research Project, in which a right-leaning and a left-leaning think tank have been commissioned to examine more than 100 federal or state bills to assess whether they stack up.

Most have been found not to. Allan had a big win when the NSW upper house passed a standing order that all government bills answer a public interest questionnaire. The project has been taken over by the Susan McKinnon Foundation.

My mate Percy Allan devoted his life to trying to make the world work better. We all owe him thanks.

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Treasury's advice now back in favour with the government

The Coalition’s practice of sacking a bunch of government department heads whenever it gets back to office is clearly calculated to discourage bureaucrats from giving frank advice. Fortunately for us, the Albanese government is not as arrogant.

In my experience, weak managers surround themselves with yes-persons, so their brains – and, as they see it, their authority – aren’t challenged.

Strong managers want frank advice from their experts, so they’re less likely to stuff up. They’re confident of their ability to sift through conflicting advice and pick the best way forward.

This Liberal policy of frightening bureaucrats into keeping their opinions to themselves began when they returned to power in 1996 under John Howard. It was repeated when Tony Abbott got back in 2013, sacking then Treasury secretary Dr Martin Parkinson and various other Treasury-related department heads (narrowly missing Treasury’s incumbent, Dr Steven Kennedy).

Their crime, it seemed, was that they actually believed in the Rudd-Gillard government’s policy of using an emissions trading scheme to limit carbon emissions. Guilty as charged. Like almost all economists, Treasury accepted the scientists’ advice on the science, and believed the best tools for fighting climate change were economic instruments such as “putting a price on carbon”. Labor’s Department of Climate Change was staffed manly by Treasury people.

But the Libs’ peak disdain for the public service came under Scott Morrison who, upon attaining the top job, told the bureaucrats he wanted no advice from them, just diligent implementation of the policy decisions made by Cabinet.

What gave this bunch of not-so-super men (and the odd woman) the arrogance to believe they could govern wisely without the bureaucrats’ policy advice? Mainly, their ability to fall back on the small army of taxpayer-funded, but unaccountable ministerial staffers, mainly youngsters with political ambitions and the willingness to interpose themselves between the minister and the department.

These young punks, who think they outrank the most senior public servants, are generally big on politics, but weak on policy. Which, you’d have to say, was the Coalition cabinet’s “revealed preference”.

The apotheosis of this decadence was revealed in evidence to the robo-debt royal commission last week. Advice sought from an outside law firm, which found that the government’s cost-cutting scheme was unlawful, was paid for but not passed up the line to the minister – presumably because the bureaucrats judged it would not be welcome.

But in a little-noticed part of a recent speech by Treasurer Jim Chalmers, he left no doubt that, under Labor, Treasury’s advice would be sought, and used to improve the government’s decisions. What’s more, Treasury’s ability to convey its views to the public would be enhanced.

Chalmers noted that, even after the government had dealt with the inflation challenge, “we will have to manage a budget weighed down by persistent structural spending pressures”. Doing this required new thinking and deeper thinking, he said.

“It requires us rebuilding the evidence base for policymaking. Because, to get better, more-forward-looking economic policies, we need better, more-forward-looking policy foundations.”

Chalmers revealed six ways in which he will be “rebuilding the evidence base for policymaking”. One was “putting Treasury back at the centre of climate modelling again”, to build on “the new approach to climate risks, costs and opportunities” revealed in last month’s budget papers.

Second, Treasury’s annual statement on “tax expenditures” would be made “more accessible, more useful analysis of what tax concessions are costing the budget” and their effect on the distribution of income between high and low earners.

Economists have long believed that such “tax expenditures” are equivalent to actual government spending in their effect on the budget balance, and should be subject to just as much critical reassessment as actual spending.

But the Libs didn’t agree. Since taxes are evil, anything you do to reduce them must be a good thing, even if the concessions go to some (usually higher-earning) taxpayers and not others. They sought to play down the tax expenditure statement – which hugely annoys the interest groups receiving concessions on such things as superannuation savings, and the 50 per cent discount on taxing capital gains – by renaming it the “tax benchmark and variations statement”. Not anymore.

The third, even more significant change will be the appointment of an “evaluator-general” to regularly and publicly examine the effectiveness of government spending programs. Many programs don’t do much to achieve their stated objectives, but ministers and their department heads are notoriously reluctant to have them rigorously examined, for fear of embarrassment.

But, as first proposed by economist Dr Nicholas Gruen, such a person and their agency would have similar powers and independence to those of the much-feared Auditor-General. This should work, provided governments couldn’t do what Morrison did to the Auditor-General: cut his funding.

The appointment of an evaluator-general is official Labor policy, and has been championed by the assistant assistant treasurer, Dr Andrew Leigh, whose outstanding economic expertise is negated by his failure to align with any Labor faction.

No doubt Leigh will be keen for the evaluator to make use of the latest in evidence-based decision-making, randomised controlled trials.

The point is that one thing Treasury (and the Finance department) should be hugely knowledgeable about – but aren’t – is what policies work, and what policies don’t. An evaluator-general will fill this vacuum.

Fourth, Treasury will work with Finance Minister and Minister for Women Katy Gallagher to “ensure gender considerations are at the core of our work”, building on last month’s “gender-responsive budgeting”.

Fifth, Treasury will produce Australia’s first “national wellbeing statement” next year, which will be “a hard-headed way to gauge progress by recognising that a robust and resilient economy relies on robust and resilient people and communities”.

And finally, Chalmers will step up production of the Intergenerational Report from five-yearly to three-yearly, in the middle year of each parliamentary term. He promises the document will be “depoliticised”.

It’s true that former treasurer Joe Hockey trashed this exercise by turning it into a blatant attack on his Labor predecessors. It was hard to take subsequent reports seriously, especially when they imposed an artificial cap on tax collections over the next 40 years, while letting government spending run wild.

We need the report to be a much more balanced assessment of future budgetary challenges, not just a Treasury tract on the supposed evils of runaway government spending. We need more acknowledgement of the possible effects of climate change on the budget over the next 40 years – a start to which was made in last month’s budget.

And it would be nice if the report lived up to its name by having much more to say about intergenerational equity issues and trends, such as the effect of ever-rising house prices, and the longer-term consequences of the way the Howard government kept stacking the odds in favour of the old at the expense of the young, particularly favouring the self-proclaimed “self-funded retirees” (who never mention the huge superannuation tax concessions they’ve been given, nor that many of them also get a part-pension).

So, well done, Jim. With better advice and a better “evidence base”, now all Labor needs is the courage to stand up to a few powerful interest groups, including those industries that get the relevant union to plead their case in the new-look Canberra.

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