IPA Research Update – April 2020 | Why Australia Needs Equality Of Sacrifice

Written by:
29 April 2020
IPA Research Update – April 2020 | Why Australia Needs Equality Of Sacrifice - Featured image

Welcome to the April 2020 edition of the IPA’s Research Newsletter.

Research and analysis prepared by IPA researchers over the past month has led the policy debate in the key areas of jobs, debt, red tape, democracy, freedom, and equality of sacrifice.

In this email you will read about how IPA Research Fellows Cian Hussey and Kurt Wallace were the first in the country to undertake economic modelling on the impact of the COVD-19 measures on job losses and the accumulation of record levels of public debt, and what this means for young Australians.

You will read about how, for the first time in Australia, IPA research has demonstrated the rapid growth and complexity of environmental regulation, and how this is stopping $65 billion worth of job-creating investment in Australia’s regions.

You will read about how Research Fellow Morgan Begg led the debate on the need to start to end the lockdown through the easing of petty social isolation restrictions which have since been undertaken in Western Australian and Queensland.

And you will read about how the IPA’s calls for equality of sacrifice between the public and private sectors has penetrated debate and has widespread support in the community.

 

How the Next Generation Faces more Debt and Higher Taxes

Long after the health impacts of COVID-19 have passed, the legacy of the necessary but costly government economic rescue and stimulus packages will remain with us through the accumulation of record levels of public debt.

Research Fellow Cian Hussey was the first to undertake economic modelling which forecast that gross Commonwealth government debt would reach $1 trillion within three years. As Cian’s analysis of 1 April found, total gross Commonwealth debt prior to the crisis was already $556 billion. To that, some $230 billion in fiscal spending measures had been announced by the Commonwealth government, meaning debt would increase by 41 per cent to $786 billion.

Cian also estimated that there would be at least $250 billion in lost revenue and higher expenses over the next three years due to the depressed economic activity resulting from social isolation measures, bringing total debt to over $1 trillion. Cian estimated that paying off the debt will cost $30,600 for each Australian.

To put this into further context, John Roskam estimated in analysis for the Australian Financial Review that even if the interest payments on this debt is “only” one per cent, that still equates to $400 each year for each Australian. And as interest rates inevitably normalise, those interest payments will continue to grow.

The rapid accumulation of debt also demonstrates the abdication of economic leadership since the GFC. That more than half of the forecast accumulation to debt occurred prior to the present crisis, and during 28 years of unbroken headline economic growth, shows that Australia’s political class has badly mismanaged the public finances of Australia. Many Australians would be willing to tolerate the debt accumulated during this crisis as the cost of an unforeseen public health crisis that necessitated extraordinary government intervention.

But the failure to get the debt burden under control during good economic times is unforgivable.

IPA research and analysis sparked a broader public debate about how Australia can pay off this debt – and that is by growing the economy by becoming more productive.

Over recent weeks the debate has broadened into commentary about “economic reform”. I must admit that I have never liked the word reform because it is ambiguous. Reform could mean higher taxes and more regulation, or shutting down coal-fired power stations, for example. The carbon tax and the NBN were billed as “reform” measures.

The Australian economy doesn’t need reform, it needs lower taxes, less red and green tape, lower electricity prices, a small and less interventionist bureaucracy, and a flexible and decentralised industrial relations system.

Public debt doesn’t just matter for economic or financial reasons. It also matters for moral reasons. The trillion dollars in Commonwealth public debt will ultimately be paid back by today’s young Australians through higher taxes, making it harder for them to get a job or start a business.

Promoting Jobs in the Private Economy

Jobs will be the most important factor in the recovery of the Australian economy and society from state and federal government-imposed social isolation measures put in place to manage the spread of COVID-19. The more Australians who stay in their job throughout the lockdown period, the quicker and stronger the recovery will be.

IPA research and analysis has identified that environmental regulation and red tape, often referred to as “green tape”, is a major impediment to business investment and job creation in Australia. Two pieces of IPA research have highlighted this as a part of the IPA’s Cut Red Tape for Australia’s Jobs research program.

Environmental “Lawfare” is Stopping Investment and Jobs

Environmental activists such as the Australian Conservation Foundation have used a special legal privilege called Section 487 to put at risk $65 billion of investment by holding major projects in court for a cumulative total of 10,100 days since the year 2000. That is the key finding of the latest research report by Research Fellow Kurt Wallace, Section 487: How Activists use Red Tape to Stop Development and Jobs (2020 update).

Some prominent examples of affected projects include a $30 billion mine expansion of the Olympic Dam mine by BHP, Adani’s $16.5 billion coal mine, a $2.3 billion Tasmanian pulp mill, the $767 million Maules Creek mine, and the $240 million Anvil Hill coal mine.

Under Section 487 of the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act) environmental activist groups are able to challenge the ministerial approval of projects which could have a major impact on a matter of national environmental significance. There are nine such matters, including nationally threatened species and ecological communities, migratory species, and a water resource in relation to coal seam gas development and large coal mining development.

The notional objective of Section 487 is to provide a legal avenue for environmental groups to ensure that ministerial approvals of major projects are being made consistent with the provisions set out in the EPBC Act. But Kurt’s research found that what is actually happening is Section 487 is being used to launch frivolous and vexatious lawsuits – often referred to as “lawfare” – which are very rarely successful in court.

Kurt analysed the annual reports of the federal environment department over the past two decades, as well as all the judgments handed down under Section 487 and found that since 2000:

  • 41 cases have proceeded to judgment.
  • A further 10 legal challenges were discontinued or withdrawn.
  • Seven cases resulted in changes to the original ministerial approval.
  • Only three of the changed approvals resulted in a substantial change in conditions.

This means that 94 per cent of cases have not led to substantial environmental changes.

The very low success rate does not mean that there is a correspondingly small impact on the projects which are subject to legal challenge. Far from it. Environmental groups can take advantage of the asymmetric nature of the costs imposed by legal action. The critical factor for environmental groups is not to win the court cases, but to engage in as much litigation as possible and to draw this out for as long as possible to disrupt and delay economic development. The proponents of legal action do not need to win the court case to succeed in their broader ideological objectives. It is the process which is the punishment.

At worst, the environmental groups undertaking legal action must pay the costs of court action. But the direct costs of court action are dwarfed by the economic and social costs of forgone business investment and job creation.

This asymmetric nature of the costs of court action is precisely what environmental groups have knowingly and methodically exploited to pursue their ideological goals. Greenpeace Australia, for example, authored the strategy document Stopping the Australian Coal Export Boom which states that “our vision for the Australian anti-coal movement is that it that functions like an orchestra, with a large number of different voices combining together into a beautiful symphony (or a deafening cacophony!).”

The key strategy outlined is to ‘disrupt and delay’ key projects, while gradually eroding public and political support for the coal industry. To do this, green groups will “get in front of the critical projects to slow them down in the approval process” by undertaking “significant investment in legal capacity” in order to engage in sustained legal battles.

This is why Kurt recommends that the government repeal Section 487.

You can watch Kurt’s video explaining his research findings here. The video has already been viewed over 40,000 times.

Green Tape Continues to Grow – But There is Hope

IPA Research Fellow Cian Hussey found in his latest reportThe Growth and Complexity of Environmental Law, that federal environmental regulation contained in the EPBC Act has grown by 445 per cent since the year 2000. That is an average annual growth rate of 10.4 per cent, compared with an average annual economic growth rate of 2.9 per cent and population growth rate of 1.5 per cent over the same period.

What is so important about Cian’s research is that it digs beneath the surface and not only analyses the headline federal environmental regulations, but all the departmental and subsidiary regulations which they enable. As Cian explains, the primary mechanism for introducing new rules is through legislation passed by parliament. This is what is debated and what the public is often informed about. But this legislation also enables ministers to create or change rules through “subsidiary legislation” which is not subject to the same parliamentary oversight and, in the case of federal environmental law, is responsible for more regulation than the initial legislation passed by parliament. This is a huge democratic accountability problem and leads to a type of rule by bureaucrats and “experts”.

As the title of the report suggests, Cian also analysed the complexity of environmental law – and for the first time was able to quantitatively demonstrate the complexity of federal environmental regulations. Often those subject to environmental regulation, such as farmers, make the observation that it is difficult and sometimes impossible for them to comply with their regulatory obligations because of the sheer volume and complexity of those obligations. Cian found that these observations are well-founded.

Cian employed four quantitative methods to analyse complexity: the Shannon Entropy method which measures how likely readers of a text are to encounter new words and concepts; the Flesh Reading Ease method which measures how easy a document is to read and understand; the number of “conditionals” used in sentences such as “ifs”, “buts”, and “excepts” – more conditions makes a document harder to read; and average sentence length.

Three key research findings are:

  • A Shannon Entropy score of 9.48, which means that readers of the EPBC Act are more likely to encounter new words and concepts than readers of Shakespeare’s plays such as Romeo and Juliet.
  • The EPBC Act contains 2,057 conditionals compared to the average piece of federal legislation of 88.
  • The EPBC Act has an average sentence length of 48.41 words, compared with the average piece of federal legislation average of 34.67. By comparison, A Tale of Two Cities by Charles Dickens, the popular Victorian-era author who was paid per word, has an average sentence length of 17.7 words.

I mentioned in my last email about how the IPA is working with leading economists at the US-based Mercatus Center at George Mason University on our economics and regulation research programs. Cian’s report employs what is called the ‘RegData’ methodology that was developed by the Mercatus Center and brought to Australia by the IPA and our colleagues at RMIT University.

RegData uses machine learning and textual analysis to count the number of ‘regulatory restrictions’ contained in a given piece of legislation or subsidiary legislation. Regulatory restrictions are clauses in legislation and subsidiary legislation which compel or prevent certain behaviours. There are five such clauses captured by the RegData methodology: “shall”, “must”, “may not”, “prohibited”, and “required”.

I mentioned in the title of this section that while environmental regulation has grown, there is hope. The reason I say this is because Cian’s report, which was released only last week, has already had a big impact. In response to the release of Cian’s report which was covered in The Australian on 24 April, the federal environment minister Sussan Ley stated that the government is “set to cut green tape in time for October’s post-coronavirus federal budget.”

Cian makes a number of very important recommendations of where the government might like to start:

  • The total volume of regulation contained within the EPBC Act and associated subsidiary legislation should be returned to the year 2000 levels. This would mean a reduction in the number of regulatory restrictions from 4,820 to 855, an 82 per cent reduction.
  • Section 487 of the EPBC Act should be repealed.
  • The ‘water trigger’ should be removed from the list of Matters of National Environmental Significance which would allow more coal and coal seam gas projects to be undertaken.
  • Section 140A of the EPBC Act, which prohibits the development of nuclear power in Australia, should be repealed.
  • The EPBC Act should focus on localism and decentralisation to remove duplication and leave environmental regulation with states, territories, and the communities directly affected by such regulation.
  • Regulation under the EPBC Act should focus on environmental outcomes, rather than compliance with a process.

Cian’s report was submitted to the decadal review of the EPBC Act. Submissions closed two weeks ago, and the panel is now preparing its final report and will undertake a series of hearings. I will keep you updated on the IPA’s engagement.

Defending Freedom and Democracy

Australia is a fortunate and proud custodian of the ancient rights and liberties that were won and negotiated by the British people dating back hundreds of years at least to Magna Carta in 1215. That charter provided for limited forms of religious liberty, political representation for those paying tax, and protection from illegal imprisonment. Those limited rights and liberties have today grown to the far broader freedoms of speech, association, religion, the rule of law, legal rights such as the presumption of innocence, and representative parliamentary democracy.

It is true that the potential health crisis posed by the spread of the coronavirus necessitated abnormal government intervention through social isolation measures. But a health crisis, or any crisis, should never be used as a pretext for putting democracy and freedom on hiatus, which is precisely what has happened in Australia over the past month and in particular in Victoria and New South Wales.

Research Fellow Morgan Begg analysed the different social isolation restrictions imposed by state governments in his report States of Emergency: An Analysis of Covid-19 Petty Restrictions. To do this Morgan analysed the directions issued by state premiers and state chief medical officers under emergency declarations. Morgan’s report contains several important findings.

The first is the dramatic inconsistency in restrictions across different state governments. It is true that Australia is a federation, and so state governments should have wide discretion in terms of public policy, including in relation to emergency health issues. But it is unclear why, as Morgan found, fishing by yourself is banned in Victoria but allowed in NSW provided appropriate social distancing is practiced; or why social visits of immediate family members who do not live together are not allowed in Victoria unless for compassionate reasons, but a gathering of up to 10 people is allowed in South Australia; or why it is illegal to sit idly on a park bench in NSW or Victoria but no specific direction is provided in WA, SA, or Tasmania.

The second key finding of Morgan’s report is that many of the social isolation rules undermine Australians’ legal rights. Morgan argues that:

“The implementation of these rules is often arbitrary and inconsistent with the fundamental legal rights of Australians, such as the presumption of innocence. A violation of a direction issued under public health or emergency powers will result in a strict liability offence. This means that the state does not need to find a mental element, or a person’s intention to commit a crime, in order to be issued a penalty.”

This means that in practice people who are outside of the house would in many instances be required to justify why they are outside or being with or around other people.

Morgan’s report and associated analysis Morgan provided for The Spectator Australia raises deeper questions about the role of experts and parliamentary accountability. Even if one were to accept the premise of social distancing, it is not immediately apparent how undertaking activities by oneself or with appropriate social distancing measures could contribute to the spread of coronavirus. As Morgan argues, “many of the strict rules imposed by state governments have failed to take into consideration whether those activities can be undertaken while maintaining distancing of 1.5 metres.” In other words, there appears to be a bias towards banning economic and social activity, rather than permitting activity that can fit within the framework of 1.5 metre distancing and sensible personal hygiene.

A part of the explanation is that Australia’s normal parliamentary processes have been suspended or severely truncated. The vast majority of the social distancing measures have been passed by declaration rather than through laws passed by parliament. For example, federal parliament was suspended on 23 March and will not return until the 12th of May when for three days, according to reporting in The Australian, a number of “COVID-19 bills” will be presented to the House or Representatives. It is unclear at this stage when parliament will resume its normal business.

Some have suggested that in this extraordinary time the usual workings of Australia’s parliamentary democracy should be put on hold so that urgent measures can be introduced without the usual debate and scrutiny. I could not disagree more. Scrutiny and debate are important feature of our liberal democracy, and is more important than ever when the stakes are so high and so many Australians lives are being impacted in a deep and profound way.

If parliaments across Australia sat throughout World War II, then they should be sitting now.

Equality of Sacrifice is Needed to Protect the Australian Way of Life

One of the fundamental dividing lines throughout the coronavirus lockdown period are those who have a job and those who do not and, more broadly, those who are exposed to the economic and social fallout and those who are sheltered from it.

While many of the social isolation measures have been necessary and effective, they have also been the subject of excess and overreach, as documented in the aforementioned report by Morgan. One of the reasons for this is that those who are imposing and proposing these measures are often not those who suffer the negative consequences. Public servants, bureaucrats, medical experts, academics, politicians and their staffers are largely protected from job losses and wage cuts. Whereas small business owners, front line administrative staff, families with a mortgage, tradespeople, and low-to-medium skilled white-collar professions have suffered first and suffered most – many of those who, essentially, work within or who are exposed to the private and productive economy.

In analysis I prepared for The Australian I argued that “the economic and social burden of the government-imposed sanctions to manage the health crisis must be shared equally with the public sector, which so far has remained shielded from the fallout.”

I proposed seven modest measures to cut inefficient and wasteful government spending worth $30bn which could be redirected to help fund the commonwealth government’s economic recovery packages.

The main part of my analysis focussed on the wage differential between public and private sector workers. Public servants on average have higher wages and higher superannuation contributions than private sector workers in Australia. I have never understood why this is the case because public sector workers are also in a less risky occupation in terms both of health and safety matters and job security.

According to the Australian Bureau of Statistics, average weekly private sector earnings are 20 per cent lower than in the public sector, implying a $4.4bn annual commonwealth public service wage premium (20 per cent of the total Commonwealth public sector wage bill of $22.12bn).

Commonwealth public servants also receive at least 15.4 per cent superannuation, compared with 9.5 per cent for private sector workers, implying a $1.3bn annual Commonwealth public service superannuation premium. Further, the 15.4 per cent superannuation contribution is paid for by taxpayers and is not funded via lower take-home public sector pay, whereas the 9.5 per cent private sector superannuation contribution is paid via lower private sector wages.

The combined public sector wage premium therefore sits at $5.7bn each year, which (at an annual salary of $80,000) would be equivalent to 71,250 jobs in the private sector.

I also analysed the 2018 annual Australia Public Service Commissioner’s Remuneration Report and found an egregious example of public sector overpayment. One middle manager (referred to as an Executive Level Two) received an annual salary of $934,612 in 2018. This included a “retention bonus” of $91,196, which is higher than Australia’s median salary.

As I argued “no one in the public service should be receiving a productivity or retention bonus until the crisis is over and the unemployment rate drops below 5 per cent.”

The point is not to needlessly punish public servants, but to recognise that Australia is currently going through one of its greatest peace-time challenges since Federation, and that all Australians must be in this fight together. More importantly, I am concerned about what may happen to the public’s confidence in our democratic institutions when they see that hard-working and risk-taking entrepreneurs are losing their jobs and having their pay cut while risk-averse public servants are as wealthy and as powerful as ever before.

I will end this email with an article that I think everyone should read which goes directly to the issue of shared sacrifice. One of the important tasks that IPA researchers perform is staying informed about the best analysis that is being undertaken in Australian and overseas.

One recent piece of analysis that we have been discussing around the office is this piece by Joel Kotkin, The Two Middle Classes, published in Quillette earlier this year. Kotkin, who is the executive director of the Urban Reform Institute based in Houston, Texas, argues there are now two distinct and opposing middle classes.

“First there is the yeomanry or the traditional middle class, which consists of small business owners, minor landowners, craftspeople, and artisans, or what we would define historically as the bourgeoisie, or the old French Third Estate, deeply embedded in the private economy. The other middle class, now in ascendency, is the clerisy, a group that makes its living largely in quasi-public institutions, notably universities, media, the non-profit world, and the upper bureaucracy.”

It is that first middle class that is experiencing the negative social and economic effects of the coronavirus lockdown measures, and the second middle class that is largely sheltered from, if not actively befitting from, the measures.

Shared sacrifice between those two middle classes is not only an economic issue, but a democratic imperative.

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