Restocking the Economic Toolkit: Changes to Social Policy and the Ability of the State to Manage the Economy

Spies-Butcher, Ben, Journal of Australian Political Economy

Recent election campaigns have been dominated by the theme of 'responsible economic management'. Both major political parties have sought to take credit for the long economic boom in Australia. Yet, increasingly financial markets and economic commentators see governments and politicians as largely irrelevant to the task of economic management. Decades of deregulation and privatisation have removed, or placed political constraints on the use of, many of the traditional levers of economic policy.

The efficacy of the new policy-free economic model remains contested by political economists. Many continue to argue for more traditionally interventionist approaches, from a formal industry policy (Stilwell 2000) through to more radical interventions (e.g. Frankel 2002; Mitchell & Mosler 2002). Many of these proposals have merit. However, within the current framework, policy options are confined.

This article draws on an earlier Keynesian approach to Australian social policy and an emerging economic literature on welfare provision to argue for a renewed focus on the economic implications of welfare state policies. A number of social policy analysts have argued that Australia's model of social policy has often used economic policy tools and goals such as macroeconomic stabilisation, arbitration and full employment as the basis for achieving social policy outcomes (Castles 1985; Smyth 1994; Cass & Freeland 1994; Battin 1997). Here I wish to focus on the reverse, that is how the policies of the welfare state play a role in the traditional jobs of economic policy, particularly in the context of the (largely ideological) constraints that many claim prevent governments from utilising other more traditionally 'economic' tools.

Social Policy and Economic Policy

The distinction between economic and social policy is a contentious and not always useful one. However, since the 1970s, there has been significant change in the policy frameworks generally associated with economic management--such as interest rates and exchange rates, public ownership, trade policy and industry policy. Yet the scale of public spending, largely connected to the welfare state, has, if anything, increased. This suggests different political dynamics, and makes it more useful to distinguish between economic policies where the deliberative role of the state has been curtailed and welfare state or social policies where government appears to be playing a larger role.

Demographic changes, such as population ageing, along with the rise of an affluent consumer culture, have changed the way governments interact with the economy. Many of the biggest economic challenges facing the long economic boom are now fundamentally problems of social policy. The declining size of the workforce, increased dependency ratios, rising inflation, the shortage of skilled labour, even production bottlenecks--many of these problems are best understood as problems of social policy, or are at least significantly connected to social policy decisions. While the economic debate in Australia has been focused on the narrow confines of aggregate public spending, social policy reforms have perhaps become more crucial to achieving longer term economic goals.

A number of social policy analysts have highlighted the economic costs associated with under spending and privatisation in individual areas of social policy. Similarly, many economists have focused on the economic, as well as redistributive, role of welfare state policies (Barr 2001; Quiggin 2007). My aim is to build on this analysis to make a broader argument about how social policy can be used in a coordinated way to achieve desirable social outcomes and address some of the challenges now facing the boom. In effect this is an argument to reunite the analysis of economic and social policy and to examine the role of the state in managing both these spheres.

This article begins by addressing the emerging consensus amongst many financial and economic commentators that governments are less and less responsible for the task of macro economic management, and the policy changes that have given rise to this perception. It then develops the claim that demographic, political and cultural dynamics are making social policy more important to economic management. The bulk of the article then briefly addresses four areas of social policy--education, health, housing and pensions--to outline, in a preliminary way, how the shift from public to private provision threatens broader economic goals.

Managing the Economy

In both the last two federal elections the incumbent Coalition Government made much of the economic boom. The Coalition has claimed credit, or at least partial credit, for the long period of sustained economic growth that has seen the official measures of unemployment at thirty year lows (Howard 2007). This no doubt reflects the sustained public support for the Coalition as a superior 'economic manager', reflected in opinion polls and public commentary (Shanahan 2007; Lebovic 2007).

However, the economic policy competence claimed by the Coalition, and reflected in public opinion, is not generally shared by commentators or analysts. Financial markets appeared to be indifferent between the parties, with little movement in the lead up to, or post the election (Moncrief 2007). Likewise, a number of academics and commentators have instead credited the boom to the economic reforms undertaken by the Hawke and Keating Labor Governments (Edwards 2006; Charlton 2007).

This later claim is of particular interest, because it ascribes credit for the boom to a fundamental realignment of the Australian state that, in the minds of its advocates, effectively removed much of the state's capacity to directly manage the economy. Thus, Ross Gittins has argued that the state no longer plays the role of economic manager:

   If you think [the role of the federal Treasurer is] to manage the
   national economy, that's what you're meant to think. But although
   the politicians on both sides want you to believe it, it hasn't
   been true for a long time. (Gittins 2007).

The changing perspectives of market commentators have a firm basis in changing policy frameworks. The past 30 years have seen a significant shift in public policy in which many traditionally Keynesian mechanisms of managing the economy have been dismantled (Battin 1997). The currency has been floated. Monetary policy has been left to the Reserve Bank (admittedly an arm of the state, although not of discretionary government policy). Industry policy has been significantly downgraded. Tariffs have been cut. Publicly owned sectors of the economy have first been corporatised and then privatised (see Pusey 2003, Appendix A; Edwards 2006, Ch 2).

These changes do not necessarily mean a reduction in the role of the state, merely a changed role (Block 1994). However, the success of economic reformers has refashioned the Australian state from one that embraced many of the principles of Keynesian interventionism, to one that increasingly allows market mechanisms to coordinate adjustments to changing economic circumstances. So while the reforms may not have reduced the role of the state per se, they have changed that role and, in doing so, increased the importance of market mechanisms to the coordination of economic life.

Yet these same processes have been far less effective at restricting the state's role in social policy. While interventionist economic policy has been in retreat, social policy has continued a forward march. Each election has seen new social policy initiatives expanding the role of the state--from baby bonuses to childcare rebates, from family benefits to subsidies for health and education. These new initiatives have come on top of a steady increase in funding for hospitals and aged care facilities. There has been a suite of policies around population ageing, childcare, education and health.

Each of these initiatives has reflected a particular approach to social policy provision, favouring private subsidy to enable choice rather than direct public provision. Many advocates of increased social spending have criticised the nature of various initiatives, such as family payments and child care (Summers 2003), health policy (Gray 2005; Deeble 2003) and education funding (Marginson & Considine 2000). However, it is important to note that social spending has not been in decline. Indeed, the contrary is the case.

This point has not escaped the advocates of further economic reform. Neoliberal advocates attacked the Coalition for what many of them term 'big government conservatism' (Norton 2006). After initial cuts to government spending in 1996-97, the Coalition Government oversaw significant spending increases. The rise was so significant, that despite a booming economy, once debt servicing is removed, government spending actually increased as a proportion of GDP over the Howard years (Norton 2006: 16). More recently the Commonwealth Treasury has released a report claiming that were it not for the favourable movement in the terms of trade owing to the resource boom, government expenditures as a proportion of GDP would have risen significantly (Laurie & McDonald 2008).

The growth of social spending no doubt reflects complex and often contradictory causes. Public choice theory, favoured by free market think tanks, has long identified incentives for governments to 'over spend', based on the concentrated benefits of spending and the diffuse costs of taxation (see Buchanan & Tullock 1962). Australia's system of progressive income taxation also provides an in-built mechanism to lift government revenues. However, there are other structural reasons that militate in favour of greater public spending.

The best publicised of these factors …

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Publication information: Article title: Restocking the Economic Toolkit: Changes to Social Policy and the Ability of the State to Manage the Economy. Contributors: Spies-Butcher, Ben - Author. Journal title: Journal of Australian Political Economy. Issue: 61 Publication date: June 2008. Page number: 267+. © 2008 Australian Political Economy Movement. COPYRIGHT 2008 Gale Group.

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