Harper response is good economics and smart politics

The adults are back in charge in Canberra.

Don’t believe me?

Then look at the federal government’s response to the recommendations of the Competition Policy Review, chaired by Professor Ian Harper. It is measured and thoughtful. It avoids unnecessary fights but keeps pushing forward the reform agenda. It may not impress the “reform junkies”. But it is very smart politics.

Getting the states on board

Many of the Harper recommendations focus on areas like human services, trading hours regulation, or uber and taxi regulations, that are outside the direct control of the federal government. So the big benefits from the Harper reforms will come through engagement with the states. The federal government will use two elements from Professor Fred Hilmer’s 1990s reform process to gain state support.

The first is a new Competition Principles Agreement (CPA). Harper recommends this. The original CPA between the federal and state governments underpinned the Hilmer reforms. A new CPA will underpin the Harper reforms. The federal government hopes to have this in place within a year.

A new CPA will include elements of the original Hilmer version. For example, it is likely to include a review process to test if legislative restrictions on competition serve the public interest.

Incentive payments

The second way the federal government will gain state support is through a new system of incentive payments. In the 1990s, the National Competition Council administered the Hilmer incentive payments. But when the payments ran out in the early 2000s, the reform process slowed and, in many areas, stopped.

The payments were not large but they were politically important. However, the Harper report missed the political element of the payments, focusing only on their economic basis. As a result, recommendation 48 of the Harper review based any new payments on a vague bureaucratic process.

In contrast, the federal government’s response to Harper recognises the need for clear incentives. Thus “[t]he Government is willing to consider payments to states and territories for regulatory reviews where subsequent reforms improve productivity and lead to economic growth” (p.10). The government accepts recommendation 48 but its response deliberately refers back to the earlier reforms.

This approach underpins the acceptance by the government of most of the Harper recommendations in areas such as human services reform, road transport, and both water and energy reform.

Avoiding unnecessarily fights

The government has not accepted all the Harper recommendations. It has side-stepped some of the hard fights. While this may upset free-market advocates, it reflects a government that knows what fights to pick and when.

For example, it simply “notes” recommendations on air and sea transport restrictions (called “cabotage”). It notes the recommendation to extend competition rules to intellectual property. But it avoids both fights.

Similarly, the response notes the recommendation that has caused most public contention - on the “misuse of market power” test (section 46)- but “will consult further”. It will also “continue discussions” on whether or not the access and pricing regulator should be separated from the Australian Competition and Consumer Commission.

It is smart politics to know which fights are not worth the effort. The debate on section 46 seemed destined to derail the entire reform process. But it is a second order issue compared to the potential reform gains from the other Harper recommendations. The response recognises this.

Competition laws and small business

The federal government has accepted almost all of the other Harper recommendations on competition laws. This will lead to simpler, better laws. It will remove politically inspired additions to the legislation that were unworkable or potentially harmful. It will also streamline areas such as the convoluted and complex cartel laws.

The government has taken a balanced approach to small business. The response was released on the same day that the former small business minister, Bruce Billson, announced that he would retire from politics at the next election. While Billson put a lot of effort into the argument on section 46, the real gains for small business are elsewhere in Harper.

In particular, the government has supported the collective bargaining recommendations that re-enliven collective boycotts by small business. These have been missing in action since a decision by the Competition Tribunal to not allow chicken growers to collectively boycott in the mid 2000s. If small business can effectively collectively bargain and collectively boycott, they will gain significant countervailing power when dealing with large buyers or suppliers.

The government was faced with differing recommendations on infrastructure access laws – one set from Harper and one set from an earlier Productivity Commission (PC) inquiry. The government chose the PC version. This was the right call and reflects the original intent of the laws.

The rebooted reform process will need oversight. Harper recommended a new Australian Council for Competition Policy (ACCP). The government’s response recognises “the need for a body to oversee progress on competition reform”. However, it also recognises that both the federal and state governments must design any new institution. Working out exactly what the ACCP will be and how it will function is a key part of the work for the next 12 months.

The next 20 years

The response is mature and thoughtful. It reflects the recent changes in Canberra. It should be welcomed by both the opposition and the states. The Hilmer reforms underpinned the last 20 years of Australia’s economic growth. This response to Harper should underpin the next 20.