The Party of Small Government

“We are the party of small government.”

Let a Liberal talk in public for longer than 30 seconds and chances are you’ll hear this nugget. But does anybody care about small government these days? And more importantly, is anybody actually making the case for policies that could be deserving of the label?

The answer to the first question is, unfortunately no. It seems to me that small government has gone out of fashion in Australia. When I talk to my millennial friends, most are happy to pay their taxes because they quite enjoy living in a society where the poor, the sick and the elderly are looked after. To them, small government translates to cuts to Medicare, cuts to the ABC, cuts to education and cuts to single parents struggling to pay the bills.

The true believers who still stand for small government (and I count myself among them) have failed to prosecute the case for it convincingly. By reducing the notion of small government to cutting taxes and cutting spending, we have lost the moral and philosophical foundation that makes the idea worth fighting for. Rather than talking about what’s best for society, we have appealed to selfishness: ‘keep more of what you earn’. This argument simply does not resonate, and I’m not convinced it ever did. The historical champions of small government, from Burke and Mill to Thatcher and Reagan, always made the case for it based on justice, dignity and the betterment of society – not appeals to naked self-interest.

What might they say about our situation today? Perhaps that borrowing money in order to fund universal benefits in excess of what we can afford is fundamentally unjust to future generations. Perhaps they’d lament that the dignified spirit of self-reliance has given way to a spirit of entitlement and a belief that government spending is the solution to every problem.

I also don’t think they’d be arguing for major tax cuts as the primary means of achieving small government. The overall tax burden didn’t meaningfully reduce under Thatcher or Reagan. Our tax to GDP ratio is around 29%, below the OECD average and less than it was during the Howard era. With demand for government services growing, especially in disability and aged care, it would be irresponsible to cut taxes further. We should certainly seek to minimise waste – and there is plenty of it – but all that can hope to achieve is a slightly smaller budget deficit.

Small government can mean many different things. The number of public servants is one measure, the amount the government taxes and spends another. More important (in my opinion) is the extent to which the government seeks to control the economy and the lives of its citizens.

This is the area in which the Liberals can really set themselves apart, in all policy domains. I’ll list just a few.

Energy

A fundamental principle of small government is that prices, not governments, should facilitate the efficient allocation of economic resources. No single policy area have we deviated so far from this principle than energy.

A small government energy policy would be remarkably simple:

• Remove all unnecessary barriers to new energy sources entering the market (including nuclear)

• Introduce a simple and transparent price signal for carbon emissions designed to meet our long-term targets – yes, a carbon tax

• Get rid of the many haphazard subsidies, funds, targets, levies and other manipulations of the market

High energy prices are the result of a market starved of long-term investment by an unpredictable policy environment and excessive government intervention. We should not be playing favourites, we should focus on creating a level playing field and a predictable long-term policy so that the private sector has the confidence to invest.

Our nuclear plan is everything a liberal policy shouldn’t be: a massive investment of taxpayer funds on a project that investors wouldn’t touch with a 10-foot pole, all to create a government owned behemoth that will crowd out private investment.

Industry Policy

Labor’s Future Made in Australia policy is the antithesis of small government: it is the government picking winners and investing taxpayer money to establish an industry that would otherwise be unprofitable.

If we want to establish a value-adding economy, we should take a leaf out of Singapore’s book and create a tax and regulatory environment that attracts investment.

We would also be wise to build on our strengths: we are far more likely to become a biotechnology superpower, given our track record in this field, than a renewable energy superpower.

Competition Policy

The current hysteria about price gouging and profiteering by supermarkets and insurance businesses is to be expected from Labor, but it is an embarrassment and a betrayal of core values when it comes from our side. Supermarket profit margins are low and stable: 3% or so. That is the sign of a well-functioning competitive market. The insurance industry is operating at closer to 30% profit margins, but margins in this industry fluctuate from year to year – since when was the Liberal Party in the business of deciding whose businesses are allowed to be profitable? It is populist nonsense.

If we were really serious about making sure the free market operates efficiently and delivers the lowest possible prices, we would be more focused on the core functions of a government: enforcing the law, clearing the path for new market entrants, and stamping out anti-competitive behaviour. Cutting company tax and burdensome regulation are the two main ways we can encourage new market entrants, boost competition and ultimately bring down prices for consumers.

Public Service

At face value, cutting the public service sounds like a good way to achieve smaller government – but doing so may well be cutting functions of government that are actually important and valuable to society. I’ve divided this into three areas:

Firstly, service delivery. The demand for government funded services is growing, therefore the number of people needed to deliver services must also grow. It is obviously preferable that services be delivered by a competitive private sector where practical, but this is usually the case already. There is therefore limited scope to cut service delivery staff without also attacking the welfare state which would be political suicide.

Secondly, regulatory functions. In a world of rapidly increasing complexity, there is also rapid growth in the extent and complexity of regulatory challenges to be addressed by government. To give one example, many people have suffered huge losses due to the inability of ASIC to prevent fraud related to cryptocurrency. Clearly their workload has increased and their numbers must also increase. The same types of challenges – arising out of new knowledge or new technologies – are being confronted in every single government department. Growth of the regulatory elements of the public service is therefore inevitable.

This may seem at odds with Liberals’ avowed opposition to green and red tape of every kind. I don’t think it is – the quality of regulation is what matters. Good regulation is simple, transparent, minimises the cost of compliance and can be administered efficiently. Bad regulation is poorly thought out, has unintended consequences, creates major delays, and is a significant barrier to doing business. The best way to minimise bad regulation is to designate more, not less, resources to designing and administering good regulation.

The final area is policy. Our previous efforts to cut down on policy staff by outsourcing to consultants is a false economy at best. Having worked as a consultant myself, I know full well that being ‘frank and fearless’ is not the way to win government contracts. Instead, consultants are incentivised to tell their clients what they want to hear. Private enterprises typically go to great lengths to attract and retain the people with core technical knowledge, and outsource non-core functions. We should take a similar approach with the public service, instead we’ve done the opposite – outsourcing the core knowledge and retaining the admin staff.

There is a more fundamental issue at hand here: there is no way of knowing how many public servants we actually need. It is a function of increasing workload and increasing productivity, neither of which can be measured. No doubt workload is increasing, but so too are productivity boosting tools like AI. These changes are gradual, and changes to the size of the public service aught also be gradual too. Massive and arbitrary cuts to public service numbers – our signature ‘small government’ policy – are likely to do more harm than good. I have seen many good projects shelved, often near completion, due to arbitrary budget or personnel cuts.

If there is one aspect of the public service we should be cutting down on, it is the thousands tasked with implementing the countless vote-buying schemes concocted by politicians. These days the answer to almost every problem raised by the community is some sort of grant, taskforce or major project, to be overseen by a troupe of highly paid public servants. This kind of administrative waste could be eliminated if we broke free of the mindset that spending taxpayer money is the best way to solve every societal problem.

That would take both courage and imagination: how might we tackle the many challenges we are facing, from mental illness to energy security, without recourse to massive spending?

If we are to reverse the trend of increased spending, burdensome regulation and central economic planning that is occurring in Australia, we must return to the first principles of liberalism and apply them to the policy challenges we are facing today. We must then argue for these policies, not on the basis of greed or short-term winners and losers, but on the basis of justice and the long-term prosperity of our country.

Perhaps then when we once again repeat the claim that “we are the party of small government”, Australians might decide that’s worth voting for.