When public trust in governments collapses, reforms get much harder

On Tuesday the treasurer will release a Productivity Commission report on the need for further economic reform. Judging from the terms of reference, the report will propose a new effort at federal-state reform. Yet public trust in our institutions – government, business and even non-governmental organisations – is collapsing. Any chance of a new round of socially desirable economic reform will rest on rebuilding the public's trust in our institutions.

Are our leaders up to the challenge, or even interested in rising to it?

The inescapable truth is that, in the immortal words of the left-leaning Nobel laureate economics professor Paul Krugman, "productivity isn't everything but in the long run it's almost everything". Productivity growth involves producing more for the same inputs and, in the modern era, working smarter with better technology, not harder.

Although Krugman wrote those words in 1994, productivity growth was the purpose of the preceding Hawke-Keating economic reform program that fashioned Australia's open, competitive economy.

Indeed, one of the incarnations of the Prices and Incomes Accord with the trade union movement, Accord Mark IV, explicitly linked wage rises with productivity growth. And Keating's mid-1990s national competition policy reform program with the states had productivity growth as its goal.

A productivity boom emanating from these reforms paved the way for Australia's world-record 26 years of recession-free economic growth.

But in more recent years the show has gone off the rails. Productivity growth has slowed. Even when productivity has grown, wages have not followed; the productivity gains have gone to capital not labour.

Convincing workers of the need to be more productive is impossible when the fruits of their efforts accrue to their employers and shareholders and not to them. Worse, employer groups advocating reductions in Sunday penalty rates, at a time when wages growth is at its weakest on record, destroy public trust in business and the entire economic system.

An international survey on trust in institutions released by Edelman this year confirms plummeting trust in business and governments. Only 26 per cent of everyday Australians consider CEOs to be highly credible, down a whopping 13 per cent in one year. Government officials did not fare much better, with just 28 per cent trusting them, down 6 per cent.

Almost 60 per cent feel the system is failing them with another 30 per cent unsure. A mere 11 per cent consider the system was working for them. Ominously, as the Productivity Commission urges a new round of reform, trust between the federal government and many state governments has crumbled. Having refused even to acknowledge that its National Energy Guarantee announced last week is actually an emissions intensity scheme that will generate a price on carbon, the federal government gave the states just 24 hours to provide input into economic modelling of the scheme.

In this environment of hyper-partisanship, Treasurer Scott Morrison, himself a political warrior, would have his work cut out if he were to try to regain some trust from the Labor states and the general public in advocating cooperative economic reform. Yet without further reform, growth in workers' incomes will need to come from grabbing a bigger slice of a fixed pie. That's much harder than sharing in the proceeds of growth.

There is, however, a glimmer of hope. When the government released the Harper report on competition policy, shadow treasurer Chris Bowen gave in-principle support to most of its recommendations. Those reforms legislated by the government passed with Labor's support.

An exception was the so-called effects test that the government claimed was designed to protect competition not competitors. It passed the Senate with the support of the Greens and the crossbenches. Last week the government's small business ombudsman confirmed Labor's worst fears, writing that the legislation will stop large businesses with significant market power from using that power in ways that have "adverse consequences for competitors". Not for competition but for competitors.

Fortunately, it is the competition regulator – the ACCC – that enforces the effects test, not the small business ombudsman. But then again, public trust in regulators is collapsing too, along with trust in the media. Looks like we all will need to lift our game if reform is to have any chance.

Source: http://www.afr.com/opinion/columnists/when...