Wednesday, February 27, 2008

Prepare for a Gruen world

Dr Nicholas Gruen has lots of good ideas. Ross Gittins wrote about several of them this week.

Ross, and me as well, think he would he great at the 2020 Summit.

But bigger, more important things are already happening. Nicholas has thought a lot about the scourge of regulation and how to smartly tame it. A Gruen world would be different to the one we are in. The default would be no regulation.

Last night, in a speech on deregulation, Australia's first Minister for Finance and Deregulation Lindsay Tanner said:

"A key to our success in advancing this deregulation agenda will be our capacity to be open with the community and facilitate compliance rather than just waiting to punish breaches.

Even small changes to practices can make a big difference. Regulators should work with industry to identify improvements to regulatory practices.

I want to encourage a culture of continuous regulatory improvement in the same way manufacturers seek to continuously refine production processes.

As US diplomat and economist Chester Bowles once remarked “government is too big and too important to be left to the politicians”.

I have asked leading economist, Nicholas Gruen, to work with me on this. Nicholas has championed the application of continuous improvement and total quality management processes to regulation."

Congratulations, Nicholas Gruen.

Below the fold is my story for this morning's CT:

The Treasurer Wayne Swan has signaled that his first budget due in eleven weeks time will cut entire government programs rather than just shave the cost of administration.

Addressing the Business Council of Australia in Melbourne last night Mr Swan said that in order to deliver high quality programs he was prepared “to cut or reprioritise” poor quality ones.

It is the first time that the Treasurer has confirmed that entire government programs are under the axe.

Declining to identify any particular government programs Mr Swan said that he was determined to ease the burden that had been placed on interest rates by undisciplined government spending.

“Let’s be honest – the previous government’s lax fiscal policy made the Reserve Bank’s job harder,” he said.

“We want to make it easier, with a new era of fiscal discipline.”

The already-promised surplus of $18 billion or 1.5 per cent of GDP was just the beginning. In addition ,Mr Swan would “let the automatic stabilisers that are built into the budget do their job”. That meant that any upward surprises in revenue would be banked, rather than spent as the previous government had done.

Previous upward surprises in revenue have been in the order to $8 billion to $12 billion, suggesting that the surplus unveiled on budget night could be as big as $30 billion.

The Treasurer stressed that the tax cuts promised during the election would be delivered despite continuing criticism from economists, most recently a former Reserve Bank board member and ANU economist Bob Gregory who claimed on Monday the cuts were “bad news”.

“Nobody in their right mind would be having these tax cuts,” he told Dow Jones Newswires.

Mr Swan said the tax cuts would add an extra 2.5 million hours of work to the economy each week as a result of the 64,000 people they would entice into the workforce.

Professor Gregory told Dow Jones that “the idea that the tax cuts will boost participation, and therefore you don't have to worry, is a story that doesn't have any serious credibility.”

He said the best way to boost labour supply was to keep economic growth strong by containing inflation, which meant canceling the tax cuts.

In Sydney last night the Minister for Finance Lindsay Tanner indicated that the budget would include an attack on red tape.

He said that every new measure that was presented to Cabinet would have to come with a Regulatory Impact Statement and satisfy a “one-in one-out” rule.

Ministers proposing new a regulations would have to specify which existing regulations they would remove.

Among the results of excessive regulation were 50 and 80 page financial product disclosure statements and a requirement that pesticide manufacturers lodge an application to change the colour of their product labels.

Mr Tanner announced the appointment of a private-sector economist Dr Nicholas Gruen to work with him on changing the nature of regulation. Dr Gruen is an advocate of contestable regulation, whereby businesses have the ability to object to regulations they can demonstrate have no point.

The government also announced the appointment of the former head of Ansett and British Airways Sir Rod Eddington as the first head of Infrastructure Australia, the new body that would prioritise infrastructure needs.

Mr Swan told the Business Council that Australia's ports, roads and railways were straining under the weight of the commodities boom.

“You see this lack of foresight in the ships sitting off our ports or the job ads that fill our papers,” he said.