Listener: 18 August, 1984.

Keywords: Governance; Growth & Innovation;

Sir Robert said he had learned after his many years in dealing with Treasury to beware of calls for quick change, because official reports rarely paid sufficient heed to the social consequences of economic change. ” (Evening Post July 18, 1984)

The consequence of being an official adviser to a government minister is that if he (or she) publicly criticises the advice, there is no opportunity for reply. Under our constitutional practices, such advice is confidential to the minister and is not made public unless the minister chooses. The principle is embodied in the Official Information Act.

However sound the principle, it presents considerable problems to economic debate in a democracy. Half of the economics profession is employed by the government, and their main function is the giving of advice

The process of constructing advice nvolves a distillation of ideas which culminate in a recommendation to the minister, listing the feasible options and assessing the advantages and disadvantages of each. Typically one option is the department’s recommendation, although it may be overruled by the minister.

This recommendation is sometimes described as the department’s view, although this gives the impression of a uniformity among its economists which rarely exists. Typically, there is a wide range of economic views among government economists and the divergent views are usually expressed strongly. The report to the minister is thus a compromise. Consider a syndicate betting on horses. Within the syndicate there may be a variety of views as to what determines winners, but in the end a horse is selected. The selected horse is unlikely to be everybody’s favourite, or even the favourite of a majority. In any case the selection does not tell you much about the disputes over the relevance of racetracks, weather, jockeys and so on.

Given this process of advice, there are difficulties about releasing the vast majority of the associated papers. Those which preceded the paper to the minister may well not reflect any balance and so be open to misinterpretation. Nevertheless, I do think that government departments, such as Treasury, should be routinely releasing a lot of their low-level papers, for instance the underlying research material. More fundamentally, if the government is going to lock up a large share of the competence of the economist’s profession under official secrecy. it is incumbent upon it to consciously promote economic debate outside the government sector.

While I cannot offer a complete assessment of the outgoing Minister of Finance’s assessment of the Treasury, there are some things which can be said. First I am surprised by the allegation that Treasury pays insufficient heed to social consequences. One insight, documented in my Progress and Pragmatism: Social Security in the Seventies, is that in income tax reform since 1976 Treasury officials have been very mindful of the social situation, and consciously designed income tax scales which recognised family poverty and the growing economic importance of women.

But social issues are not really what Treasury officials were being criticised for. I surmise – recall I have not seen the advice – that Sir Robert is alluding to the issue of “structural adjustment”, that is the need for fundamental change to the structure of the economy as a consequence of changes in overseas markets, technology , and the resource base. To repeat a familiar theme of this column, prices for our pastoral exports relative to import prices fell in 1967, and it appears that we still have not fully adjusted to that change.

There are two broad strategies. One is to adjust slowly, altering institutions over time. borrowing overseas to ease the transition. The other is a rapid change, perhaps over a year or two, which may involve bankruptcies and redeployment, and certainly involve rapid changes to some well established relationships.

The third National and third Labour governments chose the first strategy of slow adjustment – as evidenced by our growing national debt. The National government recently informed us that debt ratios would continue to rise to 1987. I suspect that Treasury would have preferred the more rapid strategy .The overseas research tends to support them. Countries that took the difficult path of rapid adjustment began prospering a year or two after. Those who did not, got increasingly into trouble and debt.

If I am right, Sir Robert is criticising Treasury for political insensitivity rather than social insensitivity. In his judgment it was not politically feasible to take the harsh path of rapid adjustment.

I do not know Treasury’s response to this view, so let me give you my judgment. In a situation where much economic decision-making is secret and the public gets little insight into why measures are being taken, harsh measures are likely to result in a political backlash. However if there is an active public economic debate, which the government encourages and does not stifle, then I believe the public is mature enough to accept harsh measures if it can be convinced that the long-term outcome is prosperity rather than debt.