‘Grey corruption’ cuts our living standards, so it’s a shame they shelved the integrity commission

Danielle Wood   Chief Executive of the Grattan Institute    February 15, 2022

A week ago, the government very quietly announced it would not deliver on its promise for a federal integrity commission in this term of Parliament. This came just a fortnight after Transparency International announced Australia had tumbled down the international league table for its corruption perceptions index.

Bad news for government integrity, certainly. But also bad news for the economy.

The uncomfortable truth is that clean government matters for living standards.

Decades of economic research have illuminated the relationship between government corruption and economic stagnation. It has also identified the reason corruption is such a handbrake on growth.

• 1st: Corruption increases the uncertainty around investment decisions. How much will I have to bribe someone to get a licence to operate? Is the government going to be giving a leg-up to my competitors? This uncertainty depresses the level of private business investment and wastes entrepreneurial talent. Why take a punt in the market when there are better returns to be had ingratiating yourself with the government?

• 2nd: Corruption influences the level and type of government spending. Tax breaks for mates, and/or channelling government money into projects to benefit friends and benefactors, means less for worthy projects and core spending such as health and education which improves the lives of everyday citizens and the productive capacity of the economy.

• 3rd:  Corruption means more red tape and regulation. The more complex the operating environment, the more incumbent firms can extract economic rents, often without raising attention. The proliferation of regulation dulls economic dynamism by creating impediments to innovation and new entrants.

• 4th: Corruption can erode some forms of what economists call “civic” or “social capital” – essentially the trust between fellow citizens. A country where suspicion and distrust is rife is a country where it is harder for firms to reach mutually beneficial deals.

If you think that these concerns only apply in “really” corrupt countries – ones where bags of money change hands to get things done – think again.

The insidious impacts of “grey corruption” – governments exercising their powers to favour private interests or political interests over the national interest – can chill economic activity through exactly the same channels.

This means we can boost Australians’ living standards by sweeping a broom through the areas where grey corruption typically flourishes.

Greater controls on pork-barrelling – the misuse of taxpayers’ money for political advantage – would be a good starting point. Examples are thick on the ground of federal and state governments directing infrastructure dollars, or grants schemes, or defence projects, with an eye to the seat margin rather than the size of benefit to the country. Redeploying the billions of dollars spent on these projects each year to ones that deliver better value for money would be an immediate boost to living standards.

Another area ripe for disinfectant is the role of money in Australian politics. The federal government lags much of the developed world, and its state government counterparts, in rules to reduce the risk of donor influence. There are currently no limits on how much money can flow to federal political candidates or parties. The transparency regime for donations is so inadequate that we can’t even be sure who the biggest donors are.

Grattan Institute analysis shows the sectors with the most to gain or lose from government decisions – mining, property and construction, gambling – tend to donate much more than we would expect given the size of their contribution to the economy. This means that Australians are living with permanently heightened risk that government decisions – including in big, economically sensitive areas like tax, housing, and climate policy – will be skewed to favour donors over the national interest.

Capping campaign expenditure and moving to best-practice disclosure requirements would lift an impediment to better policy-making.

Another priority should be safeguarding our important institutions from political interference. This means making sure that independent institutions – courts and tribunals, but also important economic institutions including the Reserve Bank, ASIC, and the ACCC – can pursue their mandates fearlessly. One step would be to ensure appointments to these types of institutions are made on merit rather than gifted to political mates, which forthcoming Grattan’s research suggests is becoming more common. For example, about 21 per cent of current members of the Administrative Appeal Tribunal have a direct political affiliation. The proportion of new members appointed to the AAT with a political affiliation increased from less than 8 per cent in 2014-15 to 32 per cent in 2018-19.

Ultimately, making sure than the best-qualified people occupy these important roles, free to make decisions without political baggage, would help Australians to retain confidence in the rule of law and independent economic decision-making. These are central foundations of Australia’s long-run economic prosperity.

Tony Wright  Associate editor and special writer

Fixing the rules of the game in each of these areas would make a difference. But a federal integrity commission is also needed, to make sure governments are playing by these rules. It must be empowered to investigate significant maladministration – these types of grey corruption – and not just criminal conduct.

Australian governments are rightly looking for a way to build a stronger, more dynamic economy in the wake of COVID-19. Cleaning up their conduct, to put the public interest at the centre of all government decision-making, would be an excellent place to start.