There are good reasons for public servants to be nervous about the coming year. This is not simply because of the impending report from the national commission of audit. Changes that the government may adopt from the report could have huge consequences for staffing and program delivery. Nevertheless, experienced public servants have been there before and will be able to deal with these changes. More important is the implications for the public service of a fundamental shift in Australia's position in the world.
January saw a run of bad economic news. Shares dropped in value on stock markets around the world, including Australia's but particularly in developing countries. There were signs of slowing growth in China, our most important trading partner. As with every bit of bad news, alarmist commentators gained cheap headlines with speculation about another global financial crisis. That risk remains low, but can never be ruled out fully until the excesses of 2000s lending have worked their way out of the United States and European banking systems. Volatility will remain the norm. The January experience was not an aberration but a symptom of the ongoing uncertainty.
That means the Australian government will need to focus more closely on its economic management in future years. Although the floating dollar and the independence of the Reserve Bank are important institutional safeguards against the vagaries of the world economy, good economic management by government remains a third crucial factor.
Whatever happens with China, the mining boom peaks of the last decade will not return; China's demand is turning more to goods and services than raw materials. Other miners around the world have become more competitive with ours. What this means for the Commonwealth budget is company tax revenues have returned to normal. Personal tax cuts introduced by the Howard government at the height of mining boom have proven unaffordable in the long term. However, any suggestion they should be reversed is the political equivalent of garlic for vampires. As a result, budget management is harder today than at any time since the 1970s.
January was also a month of bad weather news, with record-breaking heatwaves, and drought becoming widespread in parts of rural Australia. Although there are still global warming sceptics, the overwhelming consensus among climate scientists is that heatwaves caused by climate change will worsen in years to come. A freezing cold winter in parts of the US was counterbalanced by hotter than usual temperatures in Alaska that caused avalanches and floods; similarly unlikely weather occurred in numerous other locations. Volatility reigns in weather, as with the economy. Unpredictable and extreme weather conditions affect Australia more adversely than most countries.
That compounds our economic worries. The many communities affected by costs of a variable and extreme climate will call on the government to help. This in turn will make the budget harder to keep in balance over the longer term.
Thus, 2014 may go down as the year Australia finally used up its luck.
There is little sign so far that Australians have adjusted their expectations to this changing world. If anything, expectations are higher. We demand: more expensive and complicated medical treatments without wanting to pay for them; cheap utilities, transport and other infrastructure; and that the government step in to protect us from all sorts of real and imagined risks. Even when overseas, we want government help, with a couple put on a rescue flight from the Middle East asking the government for frequent flyer points (as documented in a Lowy Institute report last year).
When voters have unrealistic expectations, they tend to blame the government. Ministers will turn to the public service for advice on how to deal with the blame game. The temptation for weak ministers and weak public service advisers is always to throw money at problems; given that an unsustainable budget is itself one of those problems, throwing money will just make things worse.
The same goes for regulation. When a community or a pressure group is worried that their perceived entitlements are being eroded, they call for new regulation to protect them. Although paying lip service to reducing regulation, both the former Coalition government under John Howard and the governments of Kevin Rudd and Julia Gillard increased it. That was largely driven by weak ministers succumbing to special pleading, and an institutional framework that encourages regulation.
The institutional problem is that regulations are considered individually. Regulatory impact statements or equivalent processes weed out bad regulation. What gets through will, considered in isolation, involve net benefits. There is, however, no mechanism to look at regulations in totality and the cumulative effect is far worse than the sum of the whole. Unless ministers themselves have the courage to reject special pleading, this situation will continue.
Financial Review journalist Laura Tingle, in her 2012 Quarterly Essay Great Expectations, warned of the problem of Australians becoming angry and lashing out. They will blame both politicians and public servants for the things that make them angry. This can often lead to terrible policy. We have seen already at state level various knee-jerk policy responses of dubious merits, ranging from shooting sharks to overriding common law and constitutional rights in order to control gangs.
The temptation for weak ministers and weak public service advisers is always to throw money at problems.
Our economic troubles may lead to a rise in levels of anger. Although the recent drop in the value of the Australian dollar will make exporters more viable and help to create jobs, it will make imported goods and overseas holidays more expensive. You can bet there will be no applause for the positives and plenty of whingeing about the negatives.
There are solutions. Australians can make our own luck by being more innovative, creative and productive. The ambitious program of microeconomic reform in the late 1980s and early 1990s gave us a highly resilient economy and led to more than 20 years of prosperity and improving living standards. At the time, it was confronting and difficult. The reforms took courage and a high level of commitment on the part of public service to change itself at the same time as is expected the rest of the country to change.
The immediate signs are not promising. We will need help from neighbours such as Indonesia, rapidly emerging as one of the most important economic and cultural players in our region. At present, we seem intent on damaging our long-term future with Indonesia. It will seem short-sighted if, in 20 years, Indonesia is more successful and prosperous than Australia. It has a population of about 250 million (the fourth-largest in the world) and will have the sixth-largest economy by 2030.
We will also need a mobile and flexible workforce, but instead we lock people in place through high house prices that discourage movement. We will want schools and universities that are among the best in the world, in order to compete successfully for skills. We will want a public service workforce that welcomes and encourages private and not-for-profit-sector people to join it (and vice versa) rather than the insularity that sees public service jobs now advertised as available only to current public servants.
The longer-term signs are more encouraging. China's slowdown is an inevitable consequence of having moved from the absolute poverty of the past generation to a sustainable development path; barring internal breakdown or disruption, we have the opportunity to build a strong bilateral relationship. We can become more productive by allowing greater creativity and risk-taking and encouraging new ways of work - including from public servants (productivity should not be a code word for working longer and harder).
There are many public servants - though, sadly, few at the top levels today - who still value risk, innovation and engagement with the outside world. Given a chance, they would be prepared to embrace a program of changing our institutions so as to change our luck.
Stephen Bartos is executive director, Canberra, of ACIL Allen Consulting and a former senior public servant.