Bloated health and education sectors won't help lift productivity

UNLESS health and education can be subject to market forces, our plans to improve productivity  will remain forlorn hopes.

IN the 1920s Russia's economy slumped, only a few years after the Bolsheviks shackled it with communism. To revive it, Lenin felt compelled to permit some free trade among farmers. But he reassured his comrades that mining, energy and heavy manufacturing -- the "commanding heights" of the economy -- would remain in government ownership.

The "commanding heights" were a big fraction of Russia's economy, so Lenin's pragmatic tweak only delayed his country's ultimate collapse. The conceit that bureaucrats can plan for prosperity is ultimately, as Friedrich Hayek famously put it, fatal.

Western countries, and Australia is no exception, have wisely let market forces encroach on the traditional commanding heights, boosting productivity and long-run prosperity.

But Soviet principles of economic management remain entrenched in health and education, which have become the commanding heights of the 21st century.

The Reserve Bank put it too politely last month: "In large parts of the health and education sectors there are no market transactions for output, making it difficult to measure productivity."

Both sectors are bloated, wasteful and woefully unproductive, yet sustained by massive overconsumption fanned by a slew of government subsidies and tax exemptions. Together they have mopped up almost one in three new jobs created in Australia since 2002, sucking productive, bright people into inefficient industries.

In the year to May employment in health and education grew between five and six times faster than the Australian labour force.

Not surprisingly, the Australian government's spending on health and education has ballooned to $90 billion a year and is growing rapidly. Meanwhile, concrete health and education outcomes have showed modest improvement or sagged.

Unless health and education can be subject to market forces, our plans to reverse this country's sliding productivity and ensure Australians are still rich when the mining boom passes will remain forlorn hopes.

Sadly, the prospects for reform look grim. While European countries grapple with insolvency brought on by years of unsustainable welfare expansion, the Australian government is mulling over hurling another $14bn of taxpayers' money at health and education, in light of proposals for a National Disability Insurance Scheme and the Gonski review of education funding.

The beneficiaries of an $8bn a year NDIS are far worthier of public funds than the vast bulk of existing recipients.

The Productivity Commission pointedly said the NDIS could be funded by cutting wasteful spending or generating efficiencies elsewhere, such as first-home buyers grants, or by attaching small co-payments to all medical services to temper excessive consumption and help defray public spending. But the choice is not replacing an undeserving program with a deserving one.

Our politicians are already salivating at increasing the Medicare levy by half a percentage point. The levy shaves work incentives and displaces voluntary beneficial transactions with sterile bureaucracy as much as income tax does and tricks ordinary taxpayers into thinking "free healthcare" comes cheap.

The push to pump $6bn a year more into education is far more galling. The link between extra funds and better outcomes is extremely tenuous.

Class sizes have fallen about 40 per cent in Australia since 1964. Reversing that trend and sacking poorly performing teachers would be a better way to improve education outcomes.

The claim that smaller class sizes are good for students is an expensive furphy that retains widespread currency thanks only to teachers unions keen to swell their ranks and minimise their members' workload.

The battle to impose discipline on the resurgent health and education sectors will be tough. Unlike port workers striking to keep their $150,000 a year sinecures, the new "commanding heights" have recourse to emotional arguments about children and life and death with which to defend their privileges.

Keith Hancock wrote in 1930 that Australians saw government as a "vast public utility". Australians face Europe's fate when the mining boom ends unless that attitude changes.