The special GST deal for Western Australia initiated by the Morrison government and extended by the current government is singled out by some economists as the worst public policy mistake of the century. While the deal is bad, it’s a stretch to award it the wooden spoon; there have been much worse.
Recall that the WA GST deal involves guaranteeing the state a minimum distribution of GST revenues – it was 70 per cent but is rising to 75 per cent.Had the normal rules been applied, the percentage would have been much lower, mainly reflecting the high iron ore prices that have prevailed since the deal was struck. But rather than see the other states lose out, a “no worse off” component was agreed, leaving the federal government to make up the additional funds. It may end up costing close to $30bn across the term of the arrangement.
Don’t get me wrong: it’s bad public policy. Either you believe in the rules or you don’t. It would be fair enough to examine those rules, but to make this arbitrary tweak was an error driven entirely by politics.
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But the costs are essentially distributional, with Western Australia the big winner. What economists call deadweight or efficiency losses are relatively small in this case, although there are the compliance costs of raising additional taxes or borrowing more to cover the top-up to the other states.
The key issue is always the deadweight losses of defective policy – the losses associated with the inefficient allocation of resources caused by the erroneous signals given to consumers and producers.
Instead of resources being directed to those that most satisfy consumers as well as offering competitive returns to suppliers, poor government policy often significantly distorts these choices. The end result is lower output and lower living standards.
It is important to bear in mind the distinction between distributional impacts and deadweight losses when judging public policy. You may not agree with the specific redistribution of a particular policy, but the really big costs are those associated with the inefficiency of the policy.
There is a long list of contenders for worst public policy of the century. It includes the National Disability Insurance Scheme, the Gonski school funding model, childcare, defence procurement, the renewable energy target and other climate policies, most infrastructure spending, housing and immigration. There were several appalling policies implemented during Covid but thankfully they were short-lived, albeit costly. This list is not exhaustive.
Let me deal quickly with some Covid spending – the dollars involved were alarmingly large and the degree of waste was abysmal.
The vaccine procurement program was extremely badly administered and Australia effectively was held to ransom by Big Pharma. JobKeeper was a program with good intentions – to keep workers attached to their employers – but the guidelines were poorly drafted and compliance was close to non-existent. The result was businesses with steady or rising sales being subsidised for nothing. One estimate of the waste associated with this program exceeds $20bn.
Obviously, I don’t have the space to outline the details of all the dreadful policies on my list. My guess is that readers could also add to this inventory.
But if I look through my list, it’s hard to go past the NDIS because of the sheer scale of the dollars involved and future projections. With scant attention paid to the strong pull of incentives for participants, both actual and potential, for providers and for state governments, the federal government embarked on a scheme that is now completely out of control and is distorting other parts of the economy. It has been estimated that one-third of recent employment growth was because of the NDIS.
Again, the objectives of the program are laudable: to provide “reasonable and necessary supports” for those with the greatest degree of disability while “enabling people with disability to exercise choice and control”.
But the looseness of the quoted words in the legislation have given rise to immense problems: eligibility and the size of packages.
Initially it was expected that there would be 460,000 participants; the number is now more than 550,000, with one estimate putting the number of participants likely to reach one million in a decade. Many of the participants are children with developmental delays. The rate of exit from the NDIS is extremely low.
The scheme was going to cost under $14bn annually. The current cost is more than $40bn a year, with estimates that it may reach $125bn annually within a decade. It is the fastest growing line item in the federal budget.
It is simply not sufficient to launch well-intentioned schemes without carefully designed pilots as well as thought being given to any unintended consequences. In other words, worthy objectives are simply not enough and closing down discussion of the many issues that were evident even before the full NDIS began was extremely ill-advised.
A critical failure of the NDIS was the faulty agreement reached between the federal government and state/territory governments. Indeed, Labor member for Parramatta Andrew Charlton has described it as one of the worst governance failures of all time.
In effect, the federal government has been on the hook for 100 per cent of the cost overruns as well as picking up the tab for spending in areas (rationally) vacated by state governments, particularly spending on children with autism and ADHD.
What this has meant is that the state governments have had no incentive to support changes to the NDIS that would rein in spending. It has been easier to seem sympathetic rather than engage in frank discussion about making the NDIS a sustainable program that meets the needs of people with disabilities.
It is interesting to note that notwithstanding the extraordinary annual increases in funding for the NDIS, there are still pockets of substantial dissatisfaction with the scheme. While NDIS Minister Bill Shorten has pledged to implement several changes to rein in the growth in annual spending on the NDIS (from 14 per cent to 8 per cent), it is not clear that this undertaking will be achieved. Unless the size of the packages can be restricted, reduced even, and the number of participants restricted – again, reduced even – the NDIS is destined to become an unaffordable behemoth that will eventually have to be tamed – and dramatically
In the meantime, the size of the disability support workforce has exploded, drawing workers from other areas also in need of workers – think aged care, childcare and health services, generally.
The costs of service provision have similarly exploded as the shortage of suitable workers has its entirely predictable impact. This has inflated costs to non-NDIS participants seeking similar services.
In a tight competition for worst public policy of this century, my vote goes to the NDIS. It is the classic example of good intentions leading to an almost complete disregard for the practical details of implementation and funding, including ignoring the perverse incentives the scheme has created.
There are plenty of other bad examples, but not quite in this league. Mind you, Future Made in Australia has already become a contender.
CONTRIBUTING ECONOMICS EDITOR
Judith Sloan is an economist and company director. She holds degrees from the University of Melbourne and the London School of Economics. She has held a number of govern
