The economic debate has shifted from macro-economic issues to micro-economic reform, which is as it should be.

Despite all the bluster from successive governments politicians have very little influence over macro-economic policy. The bulk of the work goes into framing the budget, but these days this does not go to the size of the deficit (which has been set by the Treasury) but rather which Departments will take the brunt of the cuts to achieve a return to surplus.

There is no doubt that the Henry/Stevens plan for dealing with the global financial crisis was the right response, although the pudding does seem to have been over-egged on the expenditure side. Clearly such issues as have emerged have involved the implementation of the plan, which is the responsibility of the Government not its economic advisers. With the benefit of hindsight the handing out of the $900 cash payments appears to have been a very smart idea. It involved low transaction costs and kept consumption bouyant for just the right amount of time. On the other hand the insulation programme has demonstrated the futility of the Commonwealth getting into “make work” schemes.

It remains to be seen whether the Building the Education Revolution scheme will hold up. Sporadic stories of high costs and poor value have not been enough to persuade the punters that the costs outway the benefits and it is likely that the building programme will be judged a success. However there is a hidden trap and that is the cost of operating and maintaining the buildings when they are finally commissioned. This will require an increase in State education budgets and if these are not forthcoming then cuts will have to be made either to schools teaching capacity or other aspects of their operational budgets.

Now attention turns to Health. The Press are focussed on who will run the health system. Governments are concentrating on the increasing costs of health services; the health professionals are obsessed with the need for more health professionals. All of these perspectives miss the point, the real problem with health funding (as with most public services) is that the transaction costs are too high.

Transaction costs are the costs associated with the delivery of the service over and above direct cost of the service itself. When Kevin Rudd talks about duplication and waste in the system he is talking about transaction costs. When Tony Abbott talks about giving money to hospital boards directly he is talking about reducing transaction costs.

However the issue of transaction costs was not looked at systematically by the health review. We understand that it has not been looked at by the Henry Review either. Yet a reduction in these costs is the secret to containing overall costs to the budget and a rapid reduction in the deficit. There are recent instances (such as aboriginal housing where transaction costs are 200 percent of the service delivered. In the private sector transaction costs for similar services would be about fifteen percent.

It is time the political class got to grips with micro-economic reform and transaction costs are an excellent starting point.