Technocrats and Democrats

Recently, Ernst & Young (EY) called for the Australian tax reform process to be taken out of the hands of politicians, and given to an independent authority, similar to the way the Reserve Bank has responsibility for monetary policy.

Perhaps I have grown cynical, but the swinging back and forth of power in our effectively two party politics, leads inevitably to the swinging back and forth of fiscal policy. Even when government tries to break the cycle, such as in the recent Henry review, it takes many years for the good robust ideas to actually be implemented. Even where the economics is sound, the inevitable blunting of reform through pandering to each party’s power base leads to absurdities like the Minerals Resource Rent Tax. Consider the constant tinkering with the taxation of superannuation, which erodes confidence in the system, and adds unnecessary regulatory burdens to what should essentially be a robust, efficient, and dependable system.

As Sir Winston Churchill famously remarked in 1947, “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.”

There are substantial problems with Australian fiscal policy that politicians have failed to address on a long-term sustainable basis – the most obvious being the constant bickering between the states and the federal government about who should bear the burden for what. It is hardly an efficient system, and as EY point out at the end of 2013 there was a backlog of 92 announced reforms that were yet to be legislated.

So perhaps it really is time to wrest away the power from the politicians, and put it in the hands of the technocrats who can fearlessly make the reforms that are so badly needed. The idea is not without precedent –Italy has regularly resorted to technocracies in times of economic or political crisis.

But the devil is in the detail. Simplistically, monetary policy can be framed in terms of growth vs inflation, with a lever or two to run the whole machine. However, fiscal policy has way too many levers, switches, bells and whistles. Take for example the notion that the tax system should be both equitable and efficient. Means tests are one way of ensuring equity, but they add to the administrative cost and are rarely efficient. How do you reach a consensus on what this means in practice for personal tax rates, company tax rates, consumption taxes, marginal tax rates and so on? Without such a clear mandate, it is hard to see how a technocracy could deliver long lasting change compared to the messiness of democracy.

There was a time when actuaries had a similar technocratic role – determining transfer values for defined benefit schemes, or determining the bonus rate on with-profits endowments. Such work is rare these days, with consumers taking both risk and reward into their own hands via defined contribution schemes and unit linked trusts – a democratisation of savings. Even in general insurance risk pooling and cross subsidy is becoming a thing of the past, with companies moving ever towards individual risk pricing, and letting the politicians deal with the fall out of unaffordability.

Has our role as unbiased technocrats gone? Are we no longer to be arbitrators on equity? Is it just simply too old fashioned?

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