Less insular Treasury is paying off, says outgoing boss

By David Donaldson

Friday July 13, 2018

Basing staff in the nation’s big economic centres is helping Treasury keep its finger on the pulse, says the soon-to-depart John Fraser.

Improving recruitment and becoming less insular have been named by outgoing Treasury Secretary John Fraser as two key focuses of his three-and-a-half years in charge.

And they’re already paying benefits, he said in a speech the day before announcing his resignation.

Re-opening offices in the big cities in recent years has made it easier to attract skilled staff from the private sector, Fraser thinks.

“The ability to recruit at senior and middle levels has been much greater because of our Sydney and Melbourne offices. People with an interest in public policy but who also have families find it very difficult to move to Canberra,” he said.

It also means Treasury is better connected to what’s happening in the Australian economy.

“The offices in Sydney, Melbourne and Perth are not shopfronts or embassies but work in close collaboration with their policy counterparts in Canberra. They have also allowed us to establish a far broader and deeper network of contacts in the private sector, think-tanks and state governments.

“These contacts play a major part in testing policy ideas and give us a better sense of economic developments. I would humbly suggest that our good forecasting record in recent years owes much to these networks and in particular to our state and territory government contacts.”

Interestingly, Fraser thinks that when talking to the private sector the best source of intel on business conditions are small and medium-sized enterprises, whereas big businesses are more likely to be “a little formulaic and predictable”.

The changing role of Treasury

He reflected on how Treasury now “deals with a wider, more complex range of policy problems” than it did when he was there in the 1980s.

“As many of you will appreciate, the tax, financial regulation, social policy and even foreign investment policy landscapes are, by orders of magnitude, more demanding than they were in earlier decades. For instance, in the 1980s it is fair to say (and I worked there) that the foreign investment area was somewhat of a sleepy hollow and the financial markets area dealt with issues which were far simpler than today.

“Many of the silos that arguably could be maintained between policy areas in the 1980s can no longer be allowed to persist. Policy advice must, in many cases, draw on multiple areas of expertise, be forward-looking and, of course, be implementable.”

Treasury has become much better at not getting caught up in the day-to-day movements of the economy that were a problem in the 1980s, instead being able to focus on the medium-term, Fraser believes.

“Implicit in a medium-term approach to policy, after all, is the recognition that while your ultimate goals are fixed, your pursuit of them must take into account changing circumstances.

“Medium-term goals set constraints but not straight-jackets.”

This shift has allowed them to become better at thinking through the broader consequences of economic policy in the community.

“On reflection, too often we didn’t take enough notice of the transitional costs of structural adjustment. From the comfort of Canberra, we didn’t realise the very real problems faced by people having to change jobs and residence. In recent years, we have done quite a bit of work on this in Treasury.

“For instance, it is clear that the ability of people to find new employment when an industry shuts down is highly dependent on their proximity to larger cities and education levels. This is not especially profound but we should have been more mindful of this during those years of rapid change.”

Economic uncertainty making policy harder

“For policymakers, the world is a more complex and less certain place than it was before.”

Fraser noted that the long tail of the global financial crisis is persisting alongside more promising signs of economic growth.

Australia has entered its 27th straight year of economic growth — albeit at a lower rate than before the crisis — but wage growth and inflation are lower than what the models predict. The response to the GFC, meanwhile, has left us with relatively high deficit and debt, and historically low interest rates.

It’s a long way from the pre-crisis days when economists within finance ministries and central banks “were liable to be self-congratulatory” about the stability they had created, and were even bold enough to think they might have tamed the business cycle.

“At this difficult time, there is a degree of uncertainty about our economic outlook that, in other periods, may not have been warranted,” he said.

“Both the crisis and its aftermath have challenged the pre-2008 macroeconomic orthodoxy, leaving economists in a difficult position. For policymakers, the world is a more complex and less certain place than it was before.

“For both of these reasons, policymakers must increasingly feel their way.”

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