NSW is in a state of dysfunction

IN an ideal world of Westminster democracy, NSW would go to the polls in the near future. That would be in the interests of Australia, the NSW public, the Labor Party and the Liberal Party. Of course, it would not be in the interests of the decaying Labor machine that attempts to run the state Government lock, stock and barrel.

Yet an election would offer only marginal relief, given the unconvincing performance of the NSW Liberal Party, another instance of failure in the political market of Australia's largest state.

That generation of bright and reformist premiers - Nick Greiner, Jeff Kennett and Wayne Goss - has faded. Australia and the Rudd Government will carry the price since much of Australia's future economic reform depends on state governments.

The woes of NSW flow from a systemic malaise: it is a crisis of governance and a combination of circumstances. Its origins long predate the present Government of Nathan Rees and this week's mini-budget that undermines Kevin Rudd's national economic strategy.

The crisis represents the demise of the most powerful force in Australian politics, the NSW right wing, the exhaustion of the inward-looking bureaucratic model and the sustained failure of leadership to implement a viable growth model for Australia's most populous state.

Former NSW Labor Council secretary Michael Easson said: "I am astonished that the McKell model that has guided NSW Labor for generations has ended."

The McKell model, coined by former MP Rodney Cavalier and named after 1940s NSW premier William McKell, was the essence of NSW Labor's success. It involved a process of policy consent between Labor governments on one hand and the Labor Council and trade union movement on the other.

The import of its collapse for national politics is grossly underestimated.

Asked about the NSW malaise, former NSW Liberal premier Greiner says: "The truth is that NSW has been in decline and underperforming for most of the decade. There is no question it goes back to the Carr government. The decline set in after the Sydney Olympics in 2000 and the message went up then that NSW was closed for business.

"There is now a genuine loss of confidence in NSW. Consider that until a few weeks ago the main new infrastructure project was the Sydney northwest metro. Now it's been taken off the table. What does this tell us? You cannot have a proposal that goes from being right to wrong in a fortnight. It means there is no systematic plan for NSW and government departments don't know what they're supposed to be doing."

The McKell model was smashed this year when the party machine deliberately destroyed the premiership of Morris Iemma and choose Rees in his place. The message was blunt: NSW is run by the trade unions and Labor machine.

The decay of NSW Labor is reflected in the open antagonism by Paul Keating, the NSW Right's most famous son, towards the power structure and union leaders that hold sway, notably former Unions NSW secretary John Robertson, who led the campaign against electricity privatisation and is seen by many as a future premier.

In a letter that marked Robertson's recent swearing-in to parliament, Keating said that NSW Labor "will itself have no future" if it succumbed to make Robertson leader.

Rudd is alarmed but clueless about the insoluble NSW problem. It has the capacity to threaten his prime ministership in its economic and political implications.

A fortnight ago Rudd declared that "the Government of NSW has to radically lift its game". This was necessary "not just for the people of NSW but for the national economy". He's right. But Rudd is thinking about his own neck.

With the Rees Government's primary vote at 29 per cent in the latest Newspoll and NSW sure to go into recession, western Sydney's federal seats will be vulnerable at the next election. That will be a national election courtesy of the NSW fixed four-year terms, which guarantee that a failing government, no matter how incompetent, is protected from judgment by the people. It is a neat political system: the machine that delivers a recession to NSW is unaccountable to the people until March 2011.

This is a travesty of democracy that Labor people all over the nation are still defending.

Access Economics principal Chris Richardson sums up the causes of decline: "NSW hit the wall a long time ago due to a combination of bad luck and bad management. The decline began to be evident in 2001 amid the curse of high housing prices, previous premier (Bob Carr) declaring that Sydney was full and acting on that view, severe drought and then rising interest rates and a rising exchange rate that ripped the heart out of the state economy.

"The China boom meant not only that Western Australia and Queensland stole a march on NSW but that NSW was stuck with the side effects of that boom, including high interest and exchange rates. The former hit the suburbs and the latter hit the state's manufacturers. And now the global financial crisis has hit hardest in Sydney, home of half the financial institutions in Australia.

"NSW has suffered for a long time by having governments and Oppositions unprepared to take hard decisions, with the most recent example being the electricity privatisation debacle."

The accompanying chart, provided by Access Economics, sketches the rate of NSW decline compared with the rest of Australia. Richardson's is a measured economic assessment. But the crisis of governance in NSW defies such measurement. It constitutes the collapse of a political structure.

The key to Australia's 1980s economic progress was that Bob Hawke and Keating recruited the NSW machine in their cause. The key to recent NSW politics is that the Labor Council and machine smashed the elected state government because it defied the policy dictates of the ALP state conference over privatisation.

The values of NSW Labor are on display: the people of NSW must suffer cutbacks and high taxes to fill the financial hole left by the party's refusal to accept the electricity privatisation proposal put by Iemma and former treasurer Michael Costa.

This week's NSW mini-budget has multiple implications. It is a fiscal strategy with one aim: to protect the Government's triple-A credit rating. The Rees Government is too weak politically to let that rating go. The fiscal strategy, in fact, is the opposite of Rudd's fiscal stimulus to counter the downturn. The mini-budget is an act of fiscal blackmail against Rudd since it transfers most responsibility for future infrastructure to Rudd, knowing that he must try to salvage NSW.

Cavalier, a former NSW Labor minister and party historian, offers another insight into the nature of the Labor problem. He says: "The McKell model is a term I devised to describe the successful Labor model since 1941. It has two elements: Labor governments must service the needs of the people, and the ALP state conference becomes both the vehicle to endorse government policy and the vehicle that governments must honour because it reflects the will of the party.

"The model was broken when Morris Iemma pursued his privatisation against the will of the conference. There was a corresponding obligation upon the premier to wait until he had persuaded the party about the merit of his policy."

The feature of the Rees Government is its fidelity to union power. This week The Australian revealed that a NSW minister had led a group of union officials on to the site of a proposed desalination plant in defiance of the Federal Court when the company John Holland had sought to keep them out.

The Sydney Morning Herald revealed that prominent barrister Bret Walker, who headed an inquiry into Sydney Ferries, had attacked the Rees Government for ignoring his reform proposals, notably a tender to private companies. Walker said the Government's failure would "spoil for a generation" the hopes for a modern ferry service. Welcome to NSW in 2008.

Greiner says: "Carr and his treasurer Michael Egan were right years ago trying to sell the electricity assets, and they might have got $30 billion or even more." Keating, a strong backer of Iemma, previously estimated that NSW had lost $20 billion in value from not selling the assets as proposed by Carr and Egan. It was vetoed by the party.

"The real problems of NSW don't have much to do with the immediate present," Greiner says. "The fairest comparison is between NSW and Victoria, and this shows how bad the situation has become.

"As a state, NSW has much more going for it than Victoria. Yet Victoria has enjoyed a far superior political leadership and bureaucratic performance for a long period. Steve Bracks wasn't as talented a politician as Carr, but he did a far better job as premier.

"If you talk to business, housing and property companies and the banks, they will tell you that NSW has at least a five-year-old problem.

"NSW has under-invested in infrastructure for a long time."

The situation, according to Richardson, is not completely bleak. Indeed, he predicts "that the NSW economy will eventually become a turnaround story, but probably not in 2009".

Nobody knows how long it will take and how much damage will be done in the meanwhile.

This returns the focus to the fixed four-year term. Iemma's 2007 election victory meant that Labor was guaranteed another term until 2011 under the constitutional change achieved by the Greiner government.

Note the only circumstances in which an earlier election can be procured: a "no confidence" motion on the floor of the NSW Parliament or a blocking of supply, neither event feasible short of a formal split in the Labor Party. The final option, more remote, is that an election might be possible if the Governor had grounds to dismiss the Government and commission a new premier in a scenario likely to render more harm than good.

"I still think in principle that four-year terms were a good reform," Greiner says. But he makes a critical concession and admits the model is flawed. "In retrospect, I believe that some recall mechanism is now necessary," he said.

He means a device to enable an election to be held mid-term to save NSW from a truly disastrous government, such as the present administration. The point is that in a globalised world, guaranteed political tenure is a fatal flaw. The NSW experience shows that the fixed four-year term model is a fraud on the public interest.

We are losing the political culture that surrounds the Westminster model. Its flexibility, depicted as a problem, is a virtue. It means that pressure can mount on bad governments for an election and that strong governments, when they need a new mandate to confront a crisis, can seek that mandate.

The inability to procure an election in NSW at present does not help the people of NSW. It assists only the Labor machine that tries to run the state in its own interest.