Terry Moran: what does Australia's ranking slump really mean?

By Terry Moran

May 29, 2015

“Animal spirits” was the phrase that John Maynard Keynes used to remind us that economic decisions are often made for intuitive reasons, rather than the “weighted average of quantitative benefits multiplied by quantitative probabilities”.

This is partly why we measure the state of our economy through a combination of traditional econometric measures and reports of consumer and business confidence levels, even though the latter are intrinsically more subjective and influenced by one-off individual experiences and biases.

Traditional econometric measures, including GDP, are not without their flaws either. From Robert Kennedy onwards, there has been unease about the activities that are or are not counted in GDP and how well GDP growth is really linked to an increase in the sum of human happiness. It was striking that, according to one analyst, the Commonwealth Treasurer’s recent budget speech was the first for 35 years to not include the phrase “GDP” at all.

So the solution, as in many things, is moderation and being aware of which measurements are based on opinions and which are based on some form of measurable fact. The risk is when opinion-based indicators solidify into “facts on the ground”, our ability to make intelligent public policy choices is greatly reduced.

It has therefore been depressing to see what are substantively opinion-based indicators being used for areas in which we have actual figures. The release of the latest IMD World Competitiveness Yearbook is a case in point.

The Yearbook’s summary was that Australia has slipped one place from 17 to 18 in world competitiveness rankings. This was the result of a decline in four key areas: economic performance, government efficiency, business efficiency and infrastructure.

What was less highlighted is that this slippage is substantially because of the opinions of those surveyed, rather than actual data measured. The Yearbook uses a combination of statistics and the opinions of a group of ‘executives’ selected in proportion to the size of a nation’s GDP. Assuming that Australia’s economy represents roughly 2% of global GDP, this means that Australia’s results reflect the views of probably just 120-150 people. Whatever the actual size, the point is that the responses that have largely driven these results come from a group wishing to drive reform in Australia in a way that suits their interests and not necessarily those of the broader community.

For all the problems facing our economy, you would be hard pressed to find coherent economic analysis to justify the Yearbook’s claim that Australia’s actual economic performance on a global scale has declined from 13th to 28th in the last five years.

Of more concern is their measurement of “Government Efficiency”. The survey purports to show that Australia’s ranking in this area declined from 9th in 2014 to 14th in 2015, driven by major falls in “Public Finance, Fiscal Policy and Institutional Framework” measures.

The idea that, in the last twelve months, the number of countries with better “Public Finances” than Australia has increased from 13 to 28 is risible.

The very first sentence of the Introduction to the Commonwealth Government’s 2015 Budget Paper #1 notes:

“The Australian economy is entering its 25th year of economic expansion and is forecast to strengthen over the next few years. Real GDP is forecast to grow by 2.75% in 2015/16, increasing to around trend growth of 3¼ per cent in 2016-17.”

The latest IMF’s World Economic Outlook Database measured Australia’s net debt to GDP ratio in 2014 at 17%. The net debt to GDP figures for other comparable countries are: UK 81%, US 79%, Canada 39% and New Zealand 27%.

We also know that the total cost of all government in Australia, measured as a share of GDP, is less than in any other OECD country except Switzerland. It is certainly lower than in any countries that we could reasonably compare ourselves to, including Canada, our political and historical twin. It is also lower than countries such as the UK and New Zealand, which operate without state level government.

In core functions of government such as healthcare, we spend significantly less than other comparable countries and yet have higher levels of life expectancy. As a share of GDP, we spend half of what the US spends, on healthcare and yet our life expectancy is more than three years higher. In 2011, rates of death that could have been prevented by effective and timely healthcare were lower in Australia than in the US, UK, New Zealand, Sweden, Norway and the Netherlands.

Contrary to the widespread myth that the Australian public sector has grown wildly over recent decades, the reality is that public sector employment, across all levels of government and measured as a share of total employment, has fallen dramatically. In the 1980s it was around 25% of total employment. It is now about 16%, which marks a decline from one in four to one in six.

This all matters because there are very real and substantive issues facing our nation. The debate about what overall level of government taxation we want, how we best target government spending to those most in need, how we improve our schooling system, how we avoid entrenching inequality and how government can best assist our economic transition out of the mining boom, are just a few of the fundamentally important public policy questions we need good public and political debate on.

Opinion poll data masquerading as econometric data and based on the views of a handful of people serves only to muddy the waters of that debate. The Switzerland based business school that produces this Yearbook, has the motto “real world real learning”. Their publication does not seem to reflect either of these two worthy objectives.

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