Thursday, April 05, 2007

Dr. Ken Henry's sensible remarks

Secretary to the Treasury, Dr Ken Henry’s recent comments on economic policy and the role of Treasury – now available at the Treasury website - need to be listened to. I can’t see anything in them that is unreasonably critical of the Howard Government. There has been an overreaction to his comments from both sides of parliament but sensibly not from the Prime Minister and the Treasurer who have been careful in their responses.

The topic of Henry’s talk, directed to his Treasury staff, was Treasury’s effectiveness in the current economic and political environment.

Henry points to the accomplishments of Treasury on the second intergenerational report, in convening the G-20 meeting, in providing legislative advice on superannuation reform and in encouraging reforms in energy, transport and infrastructure which, if implemented by COAG, should improve productivity. All very nice and positive.

Henry regrets that the government has not paid more heed to Treasury advice on matters of climate change and water resource policy. But he doesn’t whine about this and the observations are only a few lines in a 25 page paper. Henry knows that ministers are under no obligation to accept Treasury advice and that Treasury is competing with other agencies for influence. Sensibly he suggests that Treasury can increase its influence by adopting a broad perspective, by using approaches based on analytical rigor and by effectively communicating this information to ministers and stakeholders. This cannot be construed as anti-government propaganda. Indeed Henry describes Peter Costello as able and appreciative of receiving frank advice!

Henry is concerned that with the economy operating at close to full employment so expansionary fiscal policy will crowd out private sector activity unless measures are taken to increase supply capacity. We need more people, more productivity or higher workforce participation to develop new areas of economic focus. A move into nuclear power will be feasible without training nuclear scientists which would reduce production capacities elsewhere.

This places constraints on the efficacy of taxpayer funded handouts and suggests pointing out to ministers the need to explain why contracting other parts of the economy is desirable in order to fund their pet schemes.

Another constraint imposed by full employment is the reduced community appetite for reform. Just let the good times roll as a response to improved terms of trade! Given constraints imposed by the aging population, complacency is an inappropriate attitude.

Many of these issues are driven into sharp focus by the fact that 2007 is an election year and an election that looks difficult for the current masters of the Treasury to win. During the caretaker period the Government by convention does not undertake major policy decisions. The job of Treasury is to provide factual information to Government, briefings to each of the potential governments and, as required by the Charter of Budget Honesty Act, to provide the public with accurate information on the state of the nation’s finances as well as costings of election promises.

Henry reminds his staff of the crucial need to remain non-partisan and non-political during this period. He also cautions that during the lead-up to the election there will be a greater than normal level of bad policy proposals. The issues of opportunity costs given full employment should be emphasised. This is not contentious advice and, of course, should be heeded.


Anonymous said...


Dr Ken Henry doesn't have any evidence for the likelihood of CO2-induced catastrophic warming RIGHT!

And you don't have any evidence for such warming RIGHT!

So how is it that you can suddenly turn around and call this fellows comments "SENSIBLE".

Sinclair Davidson said...

Did you see the ALP having a go at the government over the $10 billion water project? Fair enough. They are the oppositon, but they were saying Treasury hadn't vetted the project. I imagine Treasury hasn't vetted the ALP 60 percent reduction in GHG emissions either.

hc said...

Sinclair, I think Treasury should have had an input into the $10 billion water project. The technologically-oriented part of that expenditure (about $7 billion) is looking increasingly like a bad idea. Even if we understand that Treasury will be intrinsically reluctant to spend we still get good information from their idea input.

My thinking is that a 60% reduction in Greenhouse Gases would be costly but not very costly. But whatever the cost is we need to be informed of it.

I've heard Ken Henry speak a few times. It seems to me that as a civil servant he has impecable standards of fairness and integrity.

Sinclair Davidson said...

I'm not saying Treasury shouldn't have looked at it, I am saying the ALP are being hypocritical in their condemnation of the government.

The costs of 60 percent abatement may be big or small but we won't know until that analysis is actually done. What surprises me is that so little serious economic analysis is out there (not including Stern).

Mark U said...

The ALP needs to be careful about criticising the Government for not listening to Treasury on water and climate change, unless they are prepared to listen to Treasury on industrial relations.

hc said...

Mark, I think governments and oppositions should be far more relaxed about advice from Treasury that they disagree with. You are right that the ALP runs the risk of being charged with hypocrisy. But Turnbull too has overreacted - it is the old hands like Howard and Costello who understand the issues clearly.