Budget 2017/18: Should we repair the Budget? Or our Democracy?

Should the Government repair the Budget? Or should they repair our democracy?

Reading the 2017 Federal Budget papers may have led you to ask questions such as, ‘What does that mean?’ and ‘Are they kidding?’. One question it probably didn’t lead you to ask is: ‘Are democratic systems fundamentally flawed?’

Well, it turns out that the answer is: probably not. However, it is also probably the case that a country’s education level plays a vital role in the performance of their democracy.

Recently, Professor Bob Gregory delivered the Freebairn Lecture, a free guest lecture put on annually by the University of Melbourne and timed to coincide with the release of the Federal Budget. This year’s topic, fittingly, was federal fiscal policy in Australia – or, more specifically, the Federal Government’s alleged desire to ‘balance the budget’.

Professor Gregory reminded the audience that each Federal Treasurer since 2007 has valiantly pledged to achieve a budget surplus. But their plan was never to do it the easy way. They wouldn’t simply increase taxes, they would do the responsible thing and cut spending, while at the same time making the system fairer and more efficient.

We now know that none of them were able to achieve their goal, and it is unlikely that our current Treasurer will be around to claim credit for a future surplus either.

According to Professor Gregory, we should not be surprised.

A closer look at the Budget papers over this period reveals that while each Treasurer touted this plan to decrease spending rather than increase revenue, they intended to do the opposite. Over the past ten years, government spending has continued to increase, so any progress made on cutting down the deficit was brought about by increasing tax revenue.

The personal income tax system offers a convenient option for those in charge of fiscal policy. This is because of the slightly sinister-sounding phenomenon known as ‘bracket creep’, whereby tax revenue automatically increases as taxpayers move into higher brackets. Treasurers can take advantage of this to collect more revenue each year while claiming they haven’t increased taxes (because they haven’t increased the rates) and every now and then (usually before an election) they can even take credit for being the generous bloke who came along and ‘cut taxes’ by adjusting the brackets.

But while the increasing revenue from bracket creep helped their courageous cause, in each case the government hoped to further benefit from national income rising to an optimistically high rate of growth. Of course, governments don’t tell voters they are relying on hope and optimism to keep their promises. Instead they order public servants to calculate forecasts and then they show us a neat, official-looking graph. Tellingly, these forecasts are almost always wrong.  Whether you view this fact as the result of honest mistakes or as evidence of deliberate attempts to mislead the public depends on your own level of cynicism.

It would be unfair to put all the blame for these fiscal failures on the government. Forecasting is difficult to get right (although that is a reason to try and under-forecast, rather than over-forecast) and this is because there are many factors that influence fiscal outcomes besides the policy itself. Two notable problems the government has run into over this period are the worst global recession since the Depression, and the slowing economic growth of our most important trading partner, China. But this issue nonetheless throws up several interesting questions.

These include economic questions, such as whether it’s sustainable to rely so heavily on personal income tax, rather than other, more efficient (and therefore more predictable) taxes. Political questions, such as the question of what it might take for voters to accept an increase in the income tax rate – or, more to the point, an increase of the size that would allow governments to fund an apparently ever-increasing array of government services.

But perhaps the most interesting question is one a little more philosophical in nature: Is there something fundamentally wrong with democracy if politicians apparently feel the need to tell voters one thing while doing the exact opposite?

This question is part of a debate that is as old as Western civilisation. In the 4th century BCE, Plato argued that democracy is an unjust (and undesirable) system because it results in a society that is ruled by carnal desires. Democracy leads to a lack of authority which means that society isn’t organised according to rational design but is rather like an anarchic society where all that matters is what each person decides they want. This leads to Plato’s famous argument that society should be ruled by an elite group of ‘philosopher-kings’, who could be trusted to think things through before making decisions.

In a more contemporary work – a report called ‘The Crisis of Democracy: On the Governability of Democracies’ published in 1975 by a controversial organisation called the Trilateral Commission – a similar argument was put forth, this time with a modern context. The authors argued that as democratic decision-making became more prevalent during the 20th century, Western governments became increasingly overburdened with providing the services demanded by citizens, while at the same time their authority to use expert advice to make decisions was eroded.

Since the release of that report, the ‘crisis of democracy’ has been a popular topic in academia. But recently, it seems to have become popular outside of academia, as well.

Electoral results in the United States and parts of Europe have become a common source of worry, particularly among progressives and advocates of international trade. The well-publicised economic success of an authoritarian China has led some casual observers to question whether democracy is all it’s cracked up to be, as a relatively small group of technocrats appeared to lift 700 million people out of poverty. Then there was the shock of the ‘Brexit’ referendum result, while in Eastern Europe there was the democratically-sanctioned annexation of part of the Ukraine.

But when approaching this topic, it’s important to be clear about which question we are trying to answer. Two caveats are in order.

The question should not be, ‘Do we need to improve democracy in Australia (or any other democratic country)?’. In the real world, no system is perfect, so there are always ways to improve the mechanisms that determine how well a system works. In the case of democracy these mechanisms are institutions – the rules that prevent things such as corruption, lobbying and media manipulation from adversely affecting outcomes. That we can and should improve these institutions goes without saying.

Another question we might ask is if democracy is the most ethical system. An argument can be made that authoritarian systems are more efficient at improving a society’s wellbeing, but that democracy is the superior system because the ability of citizens to participate in decision-making is more important than the outcomes. Where one stands on this issue depends on their moral values.

Both of those questions are important, but the question that Plato and the Trilateral Commission report were addressing is arguably more important. From a practical point of view, why would we choose a democratic system over an authoritarian system?

The most obvious reason is that democracies are better able to prevent corruption. Provided that the aforementioned institutions are doing their job, democracy creates a level of accountability that doesn’t exist in authoritarian systems.

There are factors that provide some accountability in authoritarian systems: it’s possible that poor performance by a dictatorship will lead to a revolution, and a dictator’s own ego and desire for a positive legacy could drive them to at least appear to be doing a good job. But a well-functioning democracy will certainly be better at incentivising leaders to improve the wellbeing of their citizens (rather than focus on their own wellbeing, or the wellbeing of their friends and family).

A less obvious reason that democracies work better than authoritarian systems is that they can utilise a larger pool of cumulative knowledge.

Theoretically, a democratic government asks the opinion of an entire population before making any decision. But the information they receive amounts to more than just conventional knowledge (such as language and maths skills) and wisdom (knowledge gained from experience). Perhaps the most important information that democracies have at their disposal is local knowledge – a farmer in a rural town will likely have a better idea about the effect of a policy or the demand for a service in their town than a politician who spends most of their time in capital cities. This may explain why China, despite being authoritarian on-the-whole, holds direct elections at the local level.

The problem is that making the most of this informational advantage is not straightforward. Again, the role of institutions is clearly important, but a population’s education level also becomes crucial.

The level of education in this case refers to the rate of attainment, the level of attainment and the quality of the education received. When any of these attributes are lacking then a government is less able to rely on the information it gets, which means that the population is less able to rely on the government to make well-informed decisions.

The ability to read and perform basic statistical analysis is less likely to lead to worthwhile knowledge unless a voter knows how to ask the right research questions. Wisdom gained from experience is virtually useless if a voter is easily tricked by fallacies such as the ‘post hoc ergo propter hoc (correlation proves causation)’ fallacy. And local knowledge about the services a community requires is less useful unless a voter understands how to think about basic economic problems.

It follows, then, that the level of education is an important determinant of how well a democracy performs. This makes sense intuitively but it is worth investigating empirically, as well.

The Economist Intelligence Unit (EIU) releases a report each year which includes an index containing 167 countries called the ‘Democracy Index’. It rates countries according to a score based on answers to 60 questions covering five categories: electoral process and pluralism, civil liberties, functioning of government, political participation and political culture. If a country scores between 8 and 10 they are categorised as a ‘full democracy’, if they score between 6 and 8 they are a ‘flawed democracy’. A score below 6 indicates the country is either ‘authoritarian’ or a ‘hybrid regime’. (To learn more about how the index is compiled, check out this article.)

Finding a standardised measure for the education level of a population is more difficult. The best statistic to use is arguably tertiary (post-secondary) education attainment rate. This is certainly an imperfect measure, partly because each country measures this slightly differently, but also because there is likely a large difference between the education levels of, for example, someone with a Doctorate in Theoretical Physics and the holder of an Associate Degree in Business.

However, students who complete post-secondary education were likely required to demonstrate a greater ability to perform research and analysis than the average secondary school graduate. Furthermore, to complete the qualification, they require not only the ability to learn but also a certain amount of inquisitiveness.

The following graph plots 2016 Democracy Index scores for X countries against attainment rate data from the Organisation for Economic Cooperation and Development (OECD). As expected, it shows a positive relationship, indicating that a higher attainment rate is correlated with a higher level of ‘democratic performance’. (Note: the graph only includes countries that scored above 6 on the Democracy Index, so each of the countries included is categorised as a democracy.)

Democracy Graph

This graph doesn’t allow us to conclude that a higher attainment rate leads to better democratic performance. However, it does throw up some more interesting questions. For example, why is the United States categorised as a ‘flawed democracy’ by the Index despite having one of the highest attainment rates?

One explanation for this is that the Americans’ institutions are letting them down. Indeed, political scientist Francis Fukuyama has argued that the United States is an example of a country suffering from what he coined as ‘institutional decay’.

Another explanation is that the high attainment rate of the United States doesn’t reflect a high level of quality in the education Americans receive. It has been argued that the quality of American universities – long considered the world’s benchmark – has been declining in recent years. But it may also be the case that the quality at lower education levels is lacking. Surveys indicating that American literacy rates are below the OECD average suggests this is the case. (While a large immigrant population explains part of these results, a low rate for Black Americans is evidence that poor educational outcomes are also a significant part of the story.)

Australia enjoys a privileged position in the top 10 of the Index at number 6. However, the distance between our score and that of the impressively-rated number 1 Norway, which has a similar attainment rate, tells us that there is room for improvement.

One of the spending reduction measures in the 2017 Budget is a cut in university funding. If this cut leads to a lower attainment rate or a reduction in the quality of Australian universities then it would be a poor policy. However, the fact that the cut will be largely neutralised by an increase in tuition fees, which can be covered by the HECS-HELP loan scheme, means that both of those outcomes are unlikely (or at least that the effect will be minimal).

Alongside this policy is a proposal to direct more funding to disadvantaged secondary schools. There is a strong argument to be made that education funding at the secondary or early education level is more likely to increase the tertiary education attainment rate – particularly in Australia. Due to a largely merit-based system, access to university in Australia depends almost entirely on educational outcomes at the secondary level.

Furthermore, if a student enters university with a higher quality secondary-level education, then they are more likely to complete the degree, and they will probably get more out of the degree, as well. This would mean the end-result is not only a larger university-educated population, but also a smarter one.

If this occurs then it may be that as our tertiary education attainment rate increases, the quality of our democracy will move closer to Norway, rather than towards the United States.

Astronomer Carl Sagan is perhaps most famous for his efforts to popularise science. He believed that being human means living in a ‘demon-haunted world’, where our own irrationality makes us vulnerable to becoming a victim of potentially harmful things such as pseudoscience and superstition. In a brilliant interview recorded shortly before his death, he summed up his view on the importance of education with the following words:

“If we are not able to ask sceptical questions, to interrogate those who tell us that something is true, to be sceptical of those in authority, then we’re up for grabs for the next charlatan, political or religious, who comes ambling along … People [have] to be educated, and they [have] to practice their scepticism and their education. Otherwise, we don’t run the government, the government runs us.”