Father of economic rationalism

also published in The West Australian on 17 September 1999 and The Age, 4 October 1999

Who in Australian politics is the father of the reform program often labelled as "economic rationalism"?  While figures like Bert Kelly -- the "modest member" who campaigned long and hard against protection -- or John Hyde, leader of the "dries" in the Fraser Government deserve mention, it is quite clear who the real father of economic rationalism is.

The Honourable Edward Gough Whitlam QC.

How can the doyen of progressive politics, the elder statesman of the expanded welfare state, be the father of economic rationalism?  Precisely because he is the father of the expanded welfare state.

From the Deakin Government of 1905-08 until 1972, Commonwealth policy was dominated by the five policy principles Paul Kelly identifies in his book The End of Certainty:  White Australia, state paternalism, trade protection, imperial benevolence and wage arbitration.

The Whitlam Government set in train events which destroyed this system.  It struck two major blows directly against the system, completing the unravelling of White Australia that the Holt Government had begun in 1966 and cutting tariffs by 25 per cent.

But the greatest blow it struck was to massively increase state paternalism.  Prior to 1972/73, Australian governments had spent 10-to-11 per cent of GDP on health, education, welfare services and income support.  By 1975/76, this had risen to 16 per cent.  It is now 22 per cent.

Since 1972/73, in real terms, the economy has increased 60 per cent per Australian while taxes have more than doubled and government welfare expenditure has more than tripled.

You don't have to be Einstein to work out that these are not indefinitely sustainable trends.  The expansion in the welfare state that the Whitlam government kicked off has created tremendous fiscal stresses that subsequent governments have had to cope with.

Government saving has collapsed.  Prior to 1972/73, Australian governments saved 2-to-3 per cent of GDP.  This dropped to zero by 1975/76 and, since then, the Australian general government sector has engaged in negative saving more often than not -- paying salaries and pensions by borrowing or selling assets.

Governments have been driven to attempt to improve the functioning of the economy so that this expanded welfare state could be funded.  Hence the unravelling of protection and the deregulation of capital and product markets.  Prior to 1972/73, on average, Australian manufacturing was dependant on tariffs and subsidies for about 35 per cent of its return on each item sold.

This is now down to 6 per cent, leading to a manufacturing sector much more focussed on commercial reality and export opportunities than lobbying Canberra.  Government could no longer finance investment substantially out of its own saving.  Government business enterprises engaged in more borrowing to finance their activities.  Given the governance problems which have plagued the sector, it was a short step to the VEDC, Tricontinental, SA State Bank and WA Inc disasters.  Government ownership became discredited.

As more and more sectors were exposed to international competition, high-cost and inefficient government businesses could no longer be tolerated.  Governments also looked to getting a much bigger return for their invested capital as they searched for revenue.  Corporatisation and privatisation was the result.  Prior to 1975/76, government businesses provided very little revenue to government;  now their revenue is worth about 2 per cent of GDP.

The entire economic reform program flowed quite directly from the pressure the relentlessly increasing welfare state placed on government budgets.  Those governments which refused to face the problems failed and were replaced by ones that would.

Gough Whitlam may not have intended to be the father of economic rationalism.  Nevertheless, that is what he turned out to be.

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