“I sense a mood among younger Australians that this situation is unacceptable and that repairs need to start somewhere. The most obvious place to begin is within the structure of the tax system,” says Ken Henry AC.
Australians face many short and medium-term economic challenges. The Reserve Bank of Australia is navigating the narrow path between persistent inflation and stagnating per capita growth, while productivity growth has re-emerged as a critical issue. Simultaneously, we are experiencing significant structural shifts, including geopolitical shocks, geo-economic fragmentation and debates about a new Australian economic model and industrial policy. Overlaying these are the urgent issues of climate change, the energy transition and demographic adjustments — all interacting in a complex political economy where the feasibility of implementing effective policy is in question. Former Treasury Secretary and current chair of the Nature Finance Council Dr Ken Henry AC, in conversation with AICD chief economist Mark Thirlwell GAICD, speaks on the implications of these pressing issues for board governance and the national interest. The conversation has been edited for length and clarity.
Intergenerational equity
Mark Thirlwell (MT): “How do you see interplay between global challenges like geopolitical shocks, climate change and demographic shifts with the ongoing political economy debate on whether effective policymaking is still possible? I want to understand your perspective on how these changes interact and how we should think about them, especially from the board and national interest viewpoints. What actions can we take?”
Ken Henry AC (KH): “Why don’t I start with the proposition that we’ve probably never been very good at intergenerational equity issues? We haven’t managed them well, whether as individuals, communities or political leaders. Humans have a time preference greater than zero, we’re inclined to see as much as we can for ourselves right now and pay for it, if we ever have to pay for it, down the track. This tendency leads to the exploitation of natural resources, often described as ‘plunder’, impacting future generations.
Our use of fossil fuels, minerals and ecosystem services has pushed significant costs onto those yet to come. Even if we don’t bear these costs now, many of us fear we will soon have to. Previously, we convinced ourselves these costs were uncertain or distant, hoping for technological breakthroughs that avoid the need to pay those costs. However, this approach is increasingly seen as too risky, necessitating immediate action.
Our democratic system, while providing legitimacy through suffrage, fails to account for the billions yet unborn who will be affected by our decisions. These future generations don’t get a vote, leaving their interests in the hands of current governments. This reliance is challenging, especially with the temptation to assume future generations will be better off due to technological advancements.”
MT: “With certainty about a better future for the next generation gone and current cost-of-living issues, people feel squeezed and focus more on the present rather than the future. How do you see this affecting long-term planning and policy?”
KH: “There are serious concerns globally about whether we might be the first generation incapable of passing on a better future to our successors. This is a significant question worth pondering, with climate change being a major reason. It’s impossible to ignore the impacts of climate change and the amenity we humans derive from being in the natural world. Additionally, every year, crops are destroyed by fire, flood, drought or storms, which are becoming more severe and frequent, yet still unpredictable. It’s becoming increasingly clear that our reliance on ecosystem services to support production has been shortsighted. We should have paid more attention to sustainability. Reflecting on these issues, I’ve been considering where our focus as economists went wrong regarding economic growth and its sustainability.”
Nature positive
MT: “Reflecting on my early economics education, environmental constraints were often downplayed, with narratives emphasising how wrong the 1970s limits to growth predictions proved, for example. What’s changed?”
KH: “You’re correct, it was poorly framed. The Club of Rome’s focus was on the finite stock of natural resources, fossil fuels and minerals, but there was no discussion of ecosystem services and our dependence on buying ecosystem services. This is now a major concern — how much longer can we ignore the industrial processes’ reliance on nature? A consensus has emerged globally, although perhaps less so in Australia, that future economic growth will depend on some degree of nature care.
Future economic growth will require rebuilding the natural capital we’ve destroyed or allowed to degrade. The ‘nature positive’ concept recognises the need to focus on natural capital as much as on physical and financial capital. Indeed, that is the way I think about ‘nature positive’ — it is a recognition that we need to pay as much attention to the condition and accumulation of natural capital as we have been paying the condition and accumulation of physical and financial capital.”
MT: “Economists often suggest using price mechanisms to value things properly, like carbon pricing. How well do you think we’re doing in pricing natural ecosystem services? Are our measurements credible and are we improving fast enough to influence incentives effectively?”
KH: “It’s a complex issue. The capitalist model and its market infrastructure — including regulations, trading, governance and accounting systems — support capital accumulation. However, we lack similar support for natural capital accumulation.
Australia has been measuring the condition of the natural environment for a long time, thanks to scientists from the Wentworth Group. They began exploring how to measure stocks of native vegetation, fauna, terrestrial water, soils and the marine environment over a decade ago. They developed methods to evaluate these environmental assets at any scale, whether in a small paddock or across vast landscapes.
The Queensland government, for example, needed these methods for its Land Restoration Fund, which aimed to buy improvements in biodiversity through reverse tender auctions. This led to the creation of Accounting for Nature, a not- for-profit body. Australia’s SEEA (System of Environmental-Economic Accounting), led by Peter Harper, has been influential in these efforts.
Accounting for Nature has measured nearly 10 million hectares of Australian land, driven by both stewardship interests and market demands. Some landholders want to know their land’s environmental condition, while others seek to access European markets or make nature-positive claims.
Global businesses and project proponents, including those in renewable energy and mining, are also interested in measuring their impact on nature. There is a commercial imperative to measure the impact of their operations on nature. However, integrity in measurement is crucial. Just as financial markets have firm rules to ensure confidence, natural capital claims need regulatory infrastructure to prevent greenwashing. There is a strong case for government involvement to determine what meets the mark.”
Economic reform
MT: “Considering some of the most commonly proposed policy changes, like rebalancing the tax system and taxing land, do you feel hopeful we can implement these reforms, or are we stuck? Do you think finding the right narrative will unify support, or are we hindered by the existence of multiple conflicting narratives?”
KH: “It depends on which side of the bed I get out of, I suppose, because both sides are true. We know that, because in the past we’ve had periods of rational policy formulation and implementation — and some things have stuck. Not everything has been undone and the Australian economy is much better for it. Even with current problems, it’s nothing like it would be if we still had the economic infrastructure of the 1970s. Much of the world underwent significant economic reforms in the 1980s, so even if Australia’s political system was ineffective, our economic infrastructure would still be different from the ’70s.
It’s incredibly important to have political leaders who are capable of constructing that compelling narrative. Without it, things just don’t get done because it’s so easy to say it can’t be done because it will cost someone. We see that all the time in Australian politics, like with the climate debate: that it’s all too expensive and we’re in a cost-of-living crisis. Let’s just pretend that technology is going to fix it for us.
To counter this, we need leaders who can articulate the long-term benefits, despite short- term costs. Such leadership has existed in the past, but if you look around now, you’d say, ‘Where the hell are they?’ This raises the question of whether strong leadership only emerges in crises. While there’s some truth to that, it’s also possible for leaders to engage the population before a crisis, emphasising the need for proactive steps.
The first Intergenerational Report, in 2002, aimed to do just that, projecting 40 years into the future and highlighting the need for action. Now, over 20 years later, we’re in a worse position than those projections indicated, underscoring the importance of timely and effective leadership.
Then you get to a really interesting question — is it the case that such leadership emerges only in a crisis, that basically the Western world is capable of producing such moments of leadership only when things have got so bad that something really big has to happen to shift people’s centre of gravity and to expand that set of what is politically feasible? I have some sympathy for that argument, but it also must be possible for leaders to bring the population into the conversation before the crisis to say, ‘It’s not a crisis yet, but it will be unless we start taking the right steps now.’
I thought that’s what we were doing with the first Intergenerational Report. We published 40- year projections and were saying that we don’t have to do all these things now, but they will have to be done at some stage, or else we’re going to be in a much worse position than we are currently. Of course, we’re now more than 20 years into those 40-year projections and we’re in a worse position than those projections outlined. The first 20 years have actually been worse than what we were projecting back then.”
MT: “In the context of political reform, do you think the issue lies with leadership incentives and structures, or is it our institutions’ inability to address future challenges? Could this be related to parliamentary terms or demographic change, given our ageing population?”
KH: “Some of the institutions we should be discussing are outside of government. As a population, we do not hold politicians accountable in a real sense. I remember the legislation of the Charter of Budget Honesty Act 1998. One of the things it required was for governments to always articulate a credible medium-term fiscal strategy. Every government since the GFC has breached that legislation. That was about 15 years ago, and for all this time, Australian governments have not adhered to the Act. If you question them about it, they give excuses, claiming we are in unusual circumstances and that as soon as we return to normal, they will implement a stringent medium- term fiscal strategy. But I just don’t accept that.
That’s my point. I don’t think we have been in unusual circumstances for 15 years straight. The purpose of having a medium-term fiscal strategy is to ensure confidence in fiscal policy, despite occasional unusual circumstances. To abandon this strategy due to supposedly unusual circumstances is nonsense. So, why can our politicians break their own laws without consequence? It’s because no-one is holding them accountable. There’s a kind of tacit agreement between political parties: ‘I won’t call you out if you don’t call me out.’
Who will call them out? We used to talk about the role of the fourth estate, and we still should. I don’t believe the media plays the same role today as it did in the 1970s, ’80s and ’90s. There may be many reasons. I’ve spoken to newspaper editors who say it’s because of social media. They argue that people still trust traditional media more. But I wonder why people are turning to social media for their news if traditional media is so reliable. I know it’s more complex than that, but there is a lack of accountability that needs addressing.”
MT: “What is the most pressing reform challenge we currently face where you are most optimistic that we will rise to the challenge?”
KH: “This might shock you, but it is in the area of tax. The younger generation in Australia is starting to take an interest in the tax system, and with good reason. They are discovering the tax system is disadvantaging them, especially through bracket creep and fiscal drag in the personal income tax system. The fiscal burden is falling heavily on their shoulders. They see this in the form of huge public debt that needs to be paid off and government spending programs, many of which overwhelmingly benefit older Australians. Additionally, they are confronted with rapidly growing defence expenditures that are difficult to understand. To be honest, I find them hard to comprehend, as well.
Furthermore, they are living in a world we have not just created, but re-created for them. It’s a world of huge uncertainty, rising costs, climate inaction and environmental degradation. I sense a mood among younger Australians that this situation is unacceptable and that repairs need to start somewhere. The most obvious place to begin is within the structure of the tax system. This gives me confidence that, at some stage, we will see genuine tax reform in this country.”
Sovereign wealth fund — did we miss a trick?
KH: “Absolutely, we did. We certainly should have done that. It’s a basic balance sheet exercise. You get taught it in Accounting 101—the difference between a recurrent transaction or a profit-and-loss action, and a balance sheet activity. If you are monetising your stocks of non-renewable resources, you shouldn’t be spending all that on consumption. That’s just foolish. You should be creating an asset that is equally durable. We made no attempt to do that, none at all.
It’s not too late. Obviously, hundreds of billions of dollars have gone out the door, mainly to foreign shareholders of multinational mining companies, which you can’t get back. But there are still hundreds of billions of dollars’ worth of minerals left in the ground that are going to follow the same path. So it’s not too late.”
This article first appeared under the headline 'Future Shock Absorber’ in the August 2024 issue of Company Director magazine.
Latest news
Already a member?
Login to view this content