If that sounds ridiculous, it’s because it is.
Apart from the unknown aspects of what was said to whom, we do know Chalmers commissioned the Treasury to analyse options for meaningful cost-of-living relief without creating any inflationary pressures.
Let’s face it, the only meaningful relief was to redesign – the Treasury’s preferred verb – the tax cuts by skewing them in favour of lower-income earners. Ultimately, Treasury Secretary Steven Kennedy had to admit that Chalmers was always in the loop.
The idea that Treasury is some sort of independent source of advice is fanciful. But don’t get me wrong here: I don’t really expect the Treasury to act as an independent agency.
After all, the staff members are public servants and they are there to serve the government of the day.
But the government can’t have it both ways: it can’t claim to receive independent advice from Treasury while knowing full well that Treasury officers are there to doing its bidding.
But what happened to frank and fearless advice, you ask?
That effectively disappeared when the departmental secretaries were put on contract and were regularly dismissed on a change of government. Most department secretaries are engaged partly because of their known political persuasions, in addition to their competence and experience.
There are some exceptions and ministers do make mistakes in these appointments.
In the US, this distinction is made clear. Departmental officials above a certain level are explicit political appointments and are engaged at the pleasure of the incumbent government. They are generally highly capable and deeply experienced; it’s just clear what their political allegiances are. Most US Treasury secretaries have had outstanding careers in academia or business.
But let me get back to the issue of the independence of the Australian Treasury and the sorry state of advice that is now regularly offered up.
One issue of ongoing uncertainty relates to the budget papers. Take Statement 2 of Budget Paper No. 1, Economic Outlook. Are the forecasts – of GDP growth, unemployment, inflation, wage growth and the like – those of Treasury or are they those of the government?
Does the Treasurer become involved in ensuring that the figures suit the government’s political agenda rather than simply giving free rein to Treasury officials?
Of course, it would be a diligent Treasurer who reads through all the budget papers, including Statement 2. But the Treasurer (or at least his staff) would check the key tables to make sure the figures are consistent with the government’s narrative.
In the current case, the growth of wages is key, but other variables can also be important.
The bottom line here is that Statement 2 does not belong exclusively to Treasury. And even in the case of a very hands-off treasurer, the figures are finalised with a view to the government’s agenda within the bounds of economic credibility. I can’t recall when Statement 2 ever forecast a recession or a significant jump in unemployment, for instance.
Another ongoing issue is the ludicrous approach Treasury takes in relation to future commodity prices, a key variable determining the budget bottom line.
Notwithstanding the constant criticism of Treasury’s unhinged assumption that commodity prices will return to their long-run averages in a matter of months – this is not how commodity prices move – the practice remains in place.
What this bizarre approach has meant in recent times is a better budget bottom line given that commodity prices have not collapsed as assumed. The Treasurer can then pat himself on the back even though the government has done nothing to contribute to this outcome. It makes the forward estimates, which are key element of the budget, a complete joke.
Take another example related to the supposed independence of Treasury. It was the time the minority Gillard government was introducing the carbon pollution reduction scheme.
Keen to quash any questions about the potential economic damage that the new law would have, Treasury undertook a modelling exercise demonstrating that the impact on GDP would be very small.
But the key was to assume there would be a material world carbon price by the middle of the second decade of the century. Without that assumption, the results would have been vastly different.
Notwithstanding this major qualification, the government had no qualms citing the results of Treasury’s supposedly independent modelling to bolster its argument.
Returning to the recent advice given by Treasury to ditch the stage three tax cuts, a short paper was publicly released that was revealing rather than informative.
For one thing, it included an analysis of what economists called the behavioural responses or second-round effects of the proposed new tax scales. It is the overwhelmingly common practice of Treasury not to include these second-round effects.
The claim was made that the cut from 19c to 16c in the dollar for those earning between $18,201 and $45,000 would induce a large increase in labour supply and therefore offset any inflationary effects.
This finding, which is subject to qualifications about the modelling, should have led Treasury to advocate this change in addition to the original stage three tax cuts, but there is no evidence that this advice was offered up.
In the past, the Treasury would have strongly supported the abolition of the 37c in the dollar bracket – a constant marginal tax rate over a very large income range has clear economic benefits. But this message is totally missing from the paper.
The broader point is that the quality of Treasury advice has been in free fall for many years.
It’s as if the officials have forgotten the core principles of economics and simply serve up recommendations that will be politically acceptable with nary any debate. And if Treasury is called on to appear independent, the officials are happy to oblige.
Where once Treasury was the premier federal government agency, it is now just one of a poor lot. Treasury officials were not consulted on most Covid-related responses even though they were crying out for cost-benefit analysis.
When it came to designing JobKeeper, a scheme to keep workers on company payrolls, Treasury officials made a complete botch of the design features. As for the advice on capping the price of gas, the less said the better. (Hint: you can’t control both price and quantity.) And where are Treasury’s warnings about the new industrial relations laws?
At heart, Treasury has become the department for revenue, with officials obsessed with finding new and novel ways to increase revenue as well as milking existing means.
Ask them about cutting expenditure or making spending more efficient and blank looks are the response. The country is the poorer for Treasury’s decline.
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