The Curse of Managerialism

On a whimsical note, I have commenced research around the issue of “Managerialism” outside of business (that is, applying commercial business practices to the running of non-business entities such as research institutions, the public service and other NGOs).  

I should say at the outset that I have had the best senior officers I could have hoped for in the past - this is not a whine about past wrongs.

Initially my interest was piqued by research showing a significant gap in remuneration between managers and, for want of a better word, content owners - in the non business sector.  Interest firmed when I discovered the nexus between the concept, the Australian Professor Mayo and the Harvard Business School (which I have great respect for but enjoy no relationship).  Today “Managerialism” is adopted as official Commonwealth dogma and no questions are entertained about its strengths and, multitudinous, weaknesses outside business.

Coincidentally, I was revisiting the Whitlam Government brush with the Interstate Commission, as part of the Australian Public Service's drive to control state/local government policy.  When I added managerialism to the mix, I came up with a challenging thought.  

Canberra - What is the real cost of managerialism in the Commonwealth Public Service?

The nub of the issue lies in the significant duplication of functions between the Commonwealth and states/local governments, largely occasioned by a single accident of history - the Australian taxation treatment of income tax.  Denis James succinctly backgrounded this change in a paper in 1997:

Perhaps the greatest source of the current vertical fiscal imbalance was the takeover of personal income tax by the Commonwealth during World War 2. A number of the States had been levying small amounts of income tax even before Federation, although the main source of taxation revenue available to them at that time were duties of customs and excise. When the power to levy customs and excise became the exclusive preserve of the Commonwealth upon Federation, the States began to develop their income tax base. Even so, the Commonwealth began to compete for this base by commencing to levy income tax in 1915. Nevertheless, prior to World War 2, the States and the Commonwealth shared the income tax base in such a way that the States were reasonably fiscally self sufficient.

However, in 1942, the Treasurer appointed a Committee to consider the question of the Commonwealth becoming the sole income taxing authority for the duration of the War, and for reimbursement payments to be made, using section 96 powers, to the States upon their retirement from the income taxing field. At the time, the various States imposed their income taxes at very different levels. The Commonwealth wished to raise income taxes to finance the War, but found itself in a quandary. If it set its income tax at a uniformly high level, this would impose a serious burden on those inhabitants in States with high income tax. Imposing low Commonwealth tax would not yield sufficient revenue. The solution was for the Commonwealth to impose a uniform, high rate of tax and reimburse the States for the income tax that they would have forgone.

The Committee presented its report and recommended that, for the duration of the War and one year afterwards, the Commonwealth government should be the sole authority to impose taxes on income and that the States should be duly compensated. In May 1942, legislation was introduced in the Federal Parliament to give effect to this recommendation and a uniform income tax scheme came into operation on 1 July 1942.

At a Premiers' Conference in January 1946, the States were informed that the Commonwealth proposed to continue uniform taxation indefinitely. A formula approach was adopted to the distribution of tax reimbursement grants which continued to be provided on condition that the States made no attempt to re-enter the income taxing field. This left the States with little alternative other than to devise new forms of taxation. 

Of course, the central collection of income tax is not a feature of US taxation practice.  Neither is the inevitable double handling of responsibility across all Australian state domestic policy (managerialism at its worst) - seen most vividly in the recent debates around health and education (and which I saw close up). 

The centralisation of income tax practice raises a couple of interesting policy issues.  

That the centralised income tax system is superior to the US system is adopted as an article of faith in this country.  In fact, the US experience suggests that separate taxation assessment is probably far more effective.  

However, imagine for a moment, a different Australia.  What if the Commonwealth only collected income tax for federal purposes (eg, defence, international relations and federal regulatory schemes).  What if the States directly collected income taxes for their own state responsibilities (eg, schools, roads and health). In that Australia, would we need a Commonwealth Department of Health and a Commonwealth Health Minister?

Here, I am disinterested in whether better or worse outcomes would be achieved.  Whatever may have been the case back in the post war era, the emergent technologies give significant new capacity to participate in making local choices with immediately recognisable taxation consequences.  

Instead, I ask the question in order to estimate the costs of the managerialist infrastructure necessitated by the present central taxation arrangements.  My rough estimates suggest that it 'wastes' up to 40% of Commonwealth Australian Public Service spend, and up to 15% of state Public Service spend.  Further, the question allows me to examine the effect of the erosion of direct price signals and how that negatively counteracts the capacity for local communities or regions to mobilise their own resources in the way they see best.  Finally, it allows me to ask what type of governance structure best minimises the risk and cost quietly embedded within our present conflicted governance structures.

I am not proposing a rewrite of the constitution, it is just fine.   

However, the replacement of the Industry Commission and a big chunk of the Commonwealth APS by a functional Interstate Commission might be an interesting first step and is tantalisingly within grasp of policy shaping (look at the undeveloped nature of the entry at: http://en.wikipedia.org/wiki/Inter-State_Commission). 

Peter Quinton

Palerang

February 2014