An Australian economic freedom index

How do budget emergencies, growing welfare dependency, and stifling red tape fit together?

The multi‑dimensional character of modern public sector activity lends itself to a form of specialisation, not least among policy experts who focus on specific policy problems in detailed and intricate ways.

A structural budget deficit is largely seen as a problem for economists, social services as one for welfare advocates and social policy academics, and regulation for business interests and other special interest groups.

Even if specific policy problems ultimately require specific solutions pertinent to the problem, there is at least one sense in which all the seemingly disconnected threads of government policy all fit together.

That is, public sector regulations, expenditures and taxes, in one way or another, compromise the ability of people to produce, distribute and exchange valuable resources, for mutual gains.

In other words, government profoundly affect the extent of economic freedom enjoyed within a society.

Since at least the early 1990s, economists have quantified the relative levels of economic freedom enjoyed in each country, and ranked countries against each other in terms of being more, or less, free.

Australia has been consistently ranked among the most economically free countries, however in a recent assessment, by the Canada‑based Fraser Institute, our economic freedom has declined markedly.

In 2011, it was estimated that Australia was the tenth freest economy in the world, compared to fifth freest in 2009 and 2010, with a larger government, increasingly loose monetary policy and heavier regulatory burdens contributing to our slide down the rankings.

Complementing international studies, the Institute of Public Affairs has designed an index ranking the six Australian states, regarding the extent to which governments allow individuals and businesses to freely engage in economic activities.

Given the degree to which fiscal and regulatory systems are centralised within the Australian federation, the economic freedom index includes the activities of commonwealth, state and, to the greatest extent possible, local governments.

Western Australia is assessed as the most economically free jurisdiction in Australia in 2011, largely due to markedly lower government spending and fewer dependents on the welfare roll.

WA is followed on the economic freedom league table by New South Wales and Victoria.

At the other end of the scale lies Tasmania, as the least free Australian state.

The Apple Isle is burdened by the weight of large public sector spending, as well as the largest share of state population directly reliant upon government for their incomes.

The state ranked second lowest on relative economic freedom, Queensland, might come as a surprise to some, especially for those who recall its halcyon days of development from the late 1970s through to the early 1990s.

The high level of capital works spending remains evident to this day but, unlike during the Bjelke‑Petersen era, Queensland public spending and debt profile today more closely resembles that of southern states, and is no longer the lowest‑taxing jurisdiction.

The highest rate of legislative passage of all jurisdictions in 2011 also weighed down the Sunshine State’s economic freedom index ranking, to fifth out of six states.

A growing number of empirical studies have shown that countries with improving economic freedom index scores tend to grow more rapidly than those recording declining freedom.

Backdating the economic freedom index methodology to the 2001 financial year, coinciding with GST reforms, the IPA economic freedom study included a quantitative analysis of the relationship between changes in state freedom index scores and gross state product per capita.

The empirical model shows a ten percentage point increase in the economic freedom index increases the growth rate of GSP per capita by about 0.2 per cent, suggesting that freer economies tend to be more strongly growing economies.

To an extent, the states can implement specific reforms ‑ reducing government spending, taxation and debt, public sector employment and welfare dependency, or regulation ‑ ensuring they make a useful contribution to improving economic freedoms within their own jurisdictions.

But with its significant fiscal and regulatory presence in each of the states, the Abbott government should play its part in reducing the adverse economic influence of big government within each state and, through it, the nation as a whole.

Implementation of the government’s stated policy agenda, such as eliminating the carbon and mining taxes, cutting wasteful spending and eliminating red tape, should assist in halting, or even reversing, the decline in national economic freedom under the previous administration.

Governments need to be mindful that the complex and specialised things they do often comes at a significant cost to economic freedom, and so freeing people to do deals with each other would leave a virtuous legacy of raising living standards for all Australians.

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20 Responses to An Australian economic freedom index

  1. stackja

    freeing people to do deals with each other

    But the ALP must be there to help with the deals. Fancy people having the sense to deal by themselves. As is shown Tassie is leading in the helping. Unlike poor WA, Vic and NSW.

  2. Bruce of Newcastle

    Plucking the goose only works to a certain extent. Too much and the poor bird dies.

    That happened Rome. And is presently destroying the West.

    Unfortunately an increasing proportion of the population is now looking to someone to look after them. They will vote for anyone who promises this to them. Eventually there will not be enough productive people left to tax to provide the surplus which feeds these people.

  3. Noddy

    Bruce of Newcastle
    #1175774, posted on February 2, 2014 at 9:06 pm
    Plucking the goose only works to a certain extent. Too much and the poor bird dies.

    ‘plucking’? watch your spelling!
    Do they ever get it right?

  4. Rafe

    If we are near the top in freedom, God help the others! Ask developers who deal with local councils and farmers saddled with native vegetation laws. Look at the Berg study on the proliferation of regulation. I appreciate that you know all that Julie :)

    The multi‑dimensional character of modern public sector activity lends itself to a form of specialisation, not least among policy experts who focus on specific policy problems in detailed and intricate ways. A structural budget deficit is largely seen as a problem for economists, social services as one for welfare advocates and social policy academics, and regulation for business interests and other special interest groups.

    So many problems are interlinked and the “specialists” miss the linkages and the synergies from simultaneous reforms (the broad front of reform of Rogernomics in NZ). Also the issues are framed in “bound to fail” or “bound to create opposition” ways” like IR conceived as controlling [read reducing] wages when it should be seen in terms of productivity and job saving/creation. Thanks to six years spent going backwards, what should be seen as job creation is now a matter of last ditch job saving in places like the fruit canning industry and cars. Penalty rates are framed by the unions in terms of protecting the workers when in fact they cost jobs. And so on.

  5. brc

    The high level of capital works spending remains evident to this day but, unlike during the Bjelke‑Petersen era, Queensland public spending and debt profile today more closely resembles that of southern states, and is no longer the lowest‑taxing jurisdiction.

    Oh, how we laughed when all those refugee Victorians fled north to find a state where you could actually get things done. But the last laugh was on them as they imported their socialist ideas and even strange house designs with them. How many times does it happen that people seek to flee a bad economic state and yet bring the very same things with them?

    The QLD of old is long gone.

  6. Rafe

    This is the Rogernomics program. Roger Douglas was the Finance Minister in NZ during the 1990s when the socialist PM Lange was having such a great time turning away US warships and making other grand gestures that he let Roger Douglas pretty much have his way on economic policy with the glaring exception of the labour market, the missing piece in the reform jigsaw.

    Ten rules for good structural reform.
    1. You need quality people.
    2. Use quantum leaps with big packages.
    3. You can’t to too fast.
    4. Maintain momentum.
    5. Consistency plus credibility gives economic confidence.
    6. Let the dog see the rabbit.
    7. Never sell the public short.
    8. Don’t blink.
    9. Incentives, choice, monopoly, get the fundamentals right.
    10. When in doubt, ask yourself “Why am I in politics?”

  7. Mr Rusty

    Since at least the early 1990s, economists have quantified the relative levels of economic freedom enjoyed in each country, and ranked countries against each other in terms of being more, or less, free.

    Comparative rankings have little value. Much like the moronic idea that the debt piled up under Labor was not a problem because everyone else had far higher actual and GDP % debt.
    Since we are being compared to countries in a world that has largely shifted leftward economic freedom as a comparative measure is pretty meaningless even if it is somewhat unsurprising that we went backwards under the “we passed more legislation than evaaah” regime.
    How do we compare ourselves to 20 or even 50 years ago? How about some absolute measures such as the amount of time, cost and number of hoops to jump through just to send a consignment of sheep from point A to point B or the number of pages of compliance if you want to open and run a small restaurant?

  8. Mooka

    The easiest way to boost the economy is to get electricity costs back to
    what they were in 2006. No C tax and no RET.Garenteed win in the next
    election.

  9. Yohan

    The empirical comparative studies are difficult to sift through because of other variables.

    For example the supposed welfare states of Scandinavia, Norway and Sweden, despite higher taxes than France and Germany, have a much more free and less regulated business environment than the later.

  10. wreckage

    There are metric tonnes of red tape and idiot legislation just screaming to be cut. Much of it far too arcane for the public to object. Given a friendly senate, all of this accumulated garbage must be taken to with a vengeance. Cut cut cut. There’s also plenty of room to give small business some breathing space, but that might violate the “no such thing as too big or too fast” (snicker) rule. Better to aim for small AND medium businesses. Big business can take care of itself.

  11. James B

    Your state economic freedom index needs a rethink, to be honest. WA has some serious anti-business laws, for example their trading hour laws. The government also owns the power networks, the public transport, and heaps of other things they don’t in states like Victoria.

  12. Yohan

    The IPA study takes into account many factors when deciding the economic freedom index.
    But one factor that is wrong is including how many people in the state are on welfare and social security payments.
    What has that got to do with economic freedom?

    For example, current rates of welfare could be geographic factors, such as retires moving to live in QLD, which thus lower QLD’s economic freedom score, when in fact they could be more open than other states.

    Or it could be a historical factor that no longer applies, such as in 2015, when the new SA Liberal government has been elected, they will have turned SA into a deregulated economic powerhouse, and thus the high rates of welfare unfairly drags down the economic index, when in fact SA is more free for business than other states.

    (that last example was a joke of course)

  13. entropy

    I would have thought the volume of legislation passed last year and Qld would have been a swag of repeal bills. Just sayin.

  14. Formerly A Political

    Yohan,

    “For example, current rates of welfare could be geographic factors, such as retires moving to live in QLD, which thus lower QLD’s economic freedom score, when in fact they could be more open than other states.”

    Not all retirees receive welfare. There are many who have provided their own source of income for their senior years and are still contributing to society by paying tax.

  15. Julie Novak

    A few short reactions, if I may.

    (i) Economic freedom indexes do not attempt to measure the absolute levels of economic freedom in jurisdictions, just relative freedom. So, for example, WA is relatively freer than the remainder, but people within it are, all the same, unfree forced to interact within extensively hampered markets.
    (ii) I am actutely aware of the specific regulatory quirks of WA. The challenge is to find robust, objective indicators appropriately capturing all dimensions of regulatory burden; very difficult to do. I settled on more generalised measures of pages of regulation and a “complexity” measure for now, but I do have some more indicators up my sleeve, so to speak, that are not backdated but can be used from 2012 or thereabouts. Those extra indicators should help.
    (iii) Why not consider welfare dependency as a factor informing relative economic freedom across jurisdictions? The German Lander economic freedom study uses this indicator, the Fraser North American study uses some fiscal dimensions of welfarism (as do I), and I explain my reasons for including it in the paper.

    In the end, I am not arguing this first edition to be the definitive statement on an empirical measure of economic freedom. In a methodological and statistical sense, I do not allow the perfect to be the enemy of the good. That said, if anyone has reasonable suggestions to make, by all means let me know.

  16. nerblnob

    Better to aim for small AND medium businesses. Big business can take care of itself.

    Well said. In my industry, the big businesses seldom complain seriously about new layers of regulation. They have the internal bureaucracies to deal with it. Bureaucracy shall speak unto bureaucracy.

    SMEs however, cannot afford to suddenly double their staff for no productive gain, merely to deal with a new layer of regulation, compliances and form-filling.

    This has the added benefit to big business of eliminating possibly troublesome competitors and game-changers.

  17. .

    What proportion of the economy is taken up by net spending or the tax take, the costs of regulation and inflation?

    The figure would be over 50%. If we were to calculate dead weight loss on all of this – we are basically lopping off a huge amount of income every year but also a much higher GDP growth rate than what we have now.

    Any of the above which cannot be justified in a utilitarian manner has no reason to exist and ought to go, besides changing to a less inefficient tax base.

  18. Julie Novak

    Hi. Not so long ago I presented a comprehensive summary of many different fiscal, and other, measures of the size of Australian governments. It can be found here: http://www.ipa.org.au/publications/2174/australia%27s-big-government-by-the-numbers/pg/2

    Needless to say, you are right, the economic burdens of all these accumulated interventions would be massive.

  19. Mundi

    QLD has no upper house so laws and debt sail right through. I fully expect to have to leave qld in the next 20-30 years.

  20. Matt

    If Australia is one of the economically free countries in the world, then it is an indictment on the very terrible situation globally, including Australia.

    The left says that Australia is not a good country, that Australia is an evil and wicked country. I agree with that assessment, but for different reasons.

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