Vol. 7, No. 2
SUMMARY
There is now a serious and growing risk of another "hard landing" unless the Government reduces its reliance on interest rates by moving quickly to a substantial budget surplus. There is scope to reduce spending by $15-16 billion over the next two years, which would produce a surplus of about 2 per cent of GDP (about $10 billion) by 1996-97. Our attached Budget submission proposes that this be done.
The submission points out that:
- There are structural as well as cyclical reasons for cutting spending, for example, to reduce social welfare spending and minimise the adverse effects of taxation on economic activity and employment.
- Expenditure has not already been "cut to the bone".
- The "Australia Already has Small Government" argument does not establish its case.
- Australia should be looking to reduce the burden of taxation.
The Government should also appoint a panel of independent people to constitute an Audit Commission to evaluate Commonwealth expenditure. This should not, however, be used as an excuse to postpone action.
INTRODUCTION
The debate about whether Commonwealth budget expenditures can or should be cut has been centred around the contribution which such cuts could or should make towards reducing the budget deficit for 1995-96, or even the current financial year. However, while there is now a clear need for the Commonwealth to reduce its call on domestic savings by more -- and faster -- than presently planned, the case for cutting expenditure is by no means solely based on arguments for improved public sector savings performance as a short-term Keynesian type response to the threat of overheating. More fundamentally, there is a need for the Commonwealth to move to a situation where it makes a substantial ongoing positive contribution to domestic savings; to reduce social welfare dependency in order both to make individuals and families more responsible for their own welfare in their own interests, and to improve economic performance; to lower taxation (and certainly to avoid tax increases) to improve the growth in employment and economic activity; and to reduce the capacity of governments of whatever political persuasion to corrupt the political system through patronising of special interest groups merely as a means of securing and maintaining political power. More generally, the experience of the last 25 years raises serious questions about the capacity of governments to solve social problems and to provide efficient and quality services. In the light of this experience, Commonwealth expenditure programmes need to be carefully and thoroughly re-assessed by an independent Audit Commission.
It is proposed that sufficient expenditure savings be made over the next two years to move the budget into a surplus of about 2 per cent of GDP (or about $10 billion) in lieu of the deficit of 0.9 per cent of GDP (about $5 billion) presently projected for 1996-97. That would imply only a slightly larger improvement in the Commonwealth contribution to saving than occurred between 1986-87 and 1988-89, when a deficit of 1 per cent of GDP was converted into a surplus of 1.7 per cent of GDP. The savings outlined -- nearly $16 billion or 3.4 per cent of GDP in 1994-95 prices -- should be adequate to achieve that and would imply a reduction in 1996-97 outlays to about $115 billion or about 22.2 per cent of GDP compared to the present projected 24.9 per cent. Excluding public debt interest, the proposed cuts imply a reduction of just over 11 per cent in 1994-95 outlays.
Additional asset sales of $24 billion are also proposed but, as these don't directly increase the Budget's contribution to saving, they are not included in the foregoing calculations.
The proposals for savings have various justifications. They involve, in particular, proposals which would:
- target welfare assistance more closely so as to concentrate it on the needier groups, and, with living standards rising, put greater emphasis on self-help or family-help, so as to reduce dependency;
- reduce or eliminate programmes which provide Commonwealth assistance directly to middle and upper income groups generally, for example, for medical and hospital services, or indirectly, for example, for culture and recreation.
- concentrate Commonwealth activities more within departmental structures rather than in separate, empire-building quangos which cater to the special interest groups;
- reduce or eliminate taxpayer-funded assistance to special interest groups which have no or only limited justification in terms of national or welfare interest;
- reduce duplication of activities with the States where there is no, or only a limited, national economic or welfare requirement for Commonwealth intervention;
- expect greater private sector involvement in the promotion and support of research and cultural activities in particular; and
- generally seek to encourage private sector saving by encouraging and expecting greater self-reliance, and to aim for a more efficient use of national resources, including by contracting out or privatising government services.
On this basis, and for reasons outlined below, the focus of the proposed expenditure savings is heavily on reducing Commonwealth own-purpose outlays. Thus, out of the total proposed reductions of $15.6 billion, about $13.7 billion or 88 per cent is in respect of own-purpose outlays. The Table on page 39 shows the breakdown of Commonwealth expenditures if all the reductions were to have occurred in 1994-95 rather than over two years (as proposed), together with comparisons with 1982-83 and 1981-82. It will be noted that own-purpose outlays after the reductions would still be about 1 percentage point of GDP higher than in 1981-82.
Total Summary
| 1994-95 (est.} Outlays | Proposed Saving | ||
| $m | $m | % | |
| Social Security | 43,449 | 5,130 | 11.8 |
| Health | 17,276 | 2,324 | 13.4 |
| Education | 10,056 | 900 | 8.9 |
| Housing and Community Amenities | 1,197 | 522 | 43.6 |
| Defence | 9,637 | 600 | 6.2 |
| Culture and Recreation | 1,351 | 894 | 66.2 |
| Transport and Communications | 1,349 | 67 | 5.0 |
| Industry Assistance | 3,587 | - | - |
| Labour and Employment | 3,520 | 1,387 | 39.4 |
| Prime Minister (a) | n.a. | 25 | n.a. |
| Aboriginal Affairs (a) | n.a. | 155 | n.a. |
| Other Economic Services | |||
| Legislative Services | 731 | - | - |
| Law, Order and Public Safety | 881 | 88 | 10.0 |
| Foreign Affairs and Overseas Aid | 2,212 | 379 | 17.1 |
| General and Scientific Research, n.e.c. | 1,072 | - | - |
| Administrative Services | 3,442 | 410 | 11.9 |
| Payments to Other Governments n.e.c. | 15,165 | 152 | - |
| Total Above | 114,926 | 13,033 | 11.3 |
| Public Debt Interest | 8,385 | 2,600 (b) | 31.0 |
| Total Outlays (Excl. Asset Sales) (c) | 123,311 | 15,633 | 12.7 |
| Privatisation (asset sales additional to those planned) | |||
| Commonwealth Bank (remainder) | n.a. | 3,500 | n.a. |
| Telecom | n.a. | 20,000 | n.a. |
| ABC/SBS | 300 | ||
| ANL | - | ||
| Medibank Private | 200 | ||
| Total Privatisation | n.a. | 24,000 | n.a. |
| Total Reduction In Published Deficit * | n.a. | 39,633 (d) | n.a. |
(a) Expenditure under these headings is included under other functions.
(b) Including from additional privatisation. The calculations allows for the loss of dividends of $1,100 million from the enterprises sold but does not allow for any faster growth in company tax revenue as a result of the likely improvement in profits.
(c) Also excludes Contingency Reserve.
(d) Including from additional privatisation.
n.a. = not applicable.
* Although additional major asset sales will reduce the Commonwealth Budget deficit as that is presented in the Commonwealth's accounts, the proceeds of such sales do not themselves lead to a net increase in national savings (except to the extent that they reduce the public debt interest burden on the Budget).
The preceding summarises the possible cuts to Commonwealth spending by function over the next two years, totalling about $15.6 billion in 1994-95 prices, together with possible additional asset sales of $24 billion over two years.
Before outlining the proposed expenditure cuts in detail, various questions are posed in order to address issues raised by the opponents of reducing government expenditure, and to elaborate on the justifications for reductions.
SHOULD THE COMMONWEALTH GOVERNMENT BECOME A NET SAVER?
There is now widespread agreement among economic and financial analysts that the Government needs to move more quickly to a budget surplus. (1) If there was any doubt as to that need it was surely removed by the latest quarterly national accounts, which showed that total real domestic final demand in the September quarter of 1994 had risen at an unsustainable 8.0 per cent rate above the corresponding quarter of 1993. The main immediate concern is that, while the deficit is projected to decline to just under 1 per cent of GDP in 1996-97, that is two years away and would still leave too large a call on savings by the Commonwealth Government in circumstances where the current account deficit is already running at almost 5 per cent of GDP, where Australia's net external liabilities are 55 per cent of GDP (up from 42 per cent of GDP as recently as 1987-88) and where the now established recovery in business investment needs to be sustained -- and at a significantly higher level -- for some time in order to raise productive capacity to a level sufficient to provide for full (or at least much fuller) employment.
With present policies, there is no prospect that the public sector's saving performance will improve to anything like the extent it did in the late 1980s -- and that improvement was, of course, quite inadequate as it turned out. While history does not necessarily repeat itself, it is relevant that the ANZ measure of public sector saving (which gives a better guide than the Public Sector Borrowing Requirement (PSBR) (net) to underlying savings performance) suggests that public sector savings will barely become positive by 1996-97.
Public Sector Saving and Dis-saving as % of GDP
Note: the ANZ measure of public saving provides a more accurate indication of the public sector's contribution to national saving than does the net PSBR. That is because the former measure excludes investment spending (which does not detract from national saving), and is adjusted to remove the distortionary impacts of inflation and depreciation.
Most analysts perceive that there is a real risk that there will again be a "clash" between an expanding private sector and a public sector whose rate of expansion is being slowed far too gradually. The triggers for this clash would come from an unsustainable growth in total domestic spending causing a further blow-out in the current account deficit and increased domestic inflationary pressures. Further sharp increases in interest rates would then, as in 1990-92, put the burden of adjustment squarely on the private sector and would, in particular, inhibit or even halt the growth in business investment that is essential to sustaining economic growth, including growth in employment. Such a clash would also again raise the possibility of a "hard landing", in which case unemployment could go to a level even higher than the 11 per cent reached in the aftermath of the 1990-91 recession.
Of course, nobody can be sure at what point the combined effect of further increases in the current account deficit and interest rates will either bring on a "hard landing" or at least cause a major slowdown in the economy. The point is that, in view of the experience of the 1980s and the fact that this recovery commenced with unemployment and the current account deficit (and our net foreign liabilities) at a much higher level than in the early 1980s, the Government should never have been running such a high risk of a "hard-landing". Just as importantly, it should have been giving preference to the job-creating private sector by making much greater room for that sector's expansion.
The contrast with New Zealand is striking. There the government is making a great deal more room for its private sector to expand over the next three years by providing for government spending to fall by 1996-97 to 31 per cent of GDP from 40 per cent in 1992-93; and by providing for the Budget surplus to be as high as 4.6 per cent of GDP in that year compared with a deficit of 2.3 per cent of GDP in 1992. This seemingly "deflationary" policy (in Keynesian terms) is confidently projected to achieve economic growth averaging nearly 4 per cent a year (and looking likely, on more recent evidence, to exceed that).
Such a growth rate is similar to that projected by the Government for the next 3 years for Australia, though in per capita terms New Zealand's growth would be faster -- and more likely to be achieved. In particular, New Zealand starts from a better position, with inflation down to about 1 per cent a year, the current external account now running a small surplus and a monetary policy framework that provides a much more convincing basis for containing inflation and domestic demand. The possibility that the budget surplus for the current financial year may now be as high as 3 per cent of GDP (well in excess of that originally estimated last June) provides an important back-up for monetary policy.
As noted, part of the rationale for the Commonwealth moving to a surplus is to maximise the potential for the private, job-creating, sector to expand. Among other things, such a move would help to reduce the upward pressure on interest rates, which operate primarily to restrain the private sector and, in particular, business investment. This is not to suggest that a surplus will mean that interest rates will not have to rise during an economic recovery: as the experience of the 1980s demonstrates, monetary and fiscal policy have to work together to try to keep the total growth in spending within limits consistent with sustaining inflation at minimal levels.
The Commonwealth should thus not only be reducing its dissaving, but actually moving as quickly as is reasonably feasible to making a positive net contribution to domestic saving through a substantial budget surplus. This should not, moreover, simply involve a cyclical surplus when the cycle is at or approaching its peak: there is also a strong case for operating a substantial ongoing surplus to help offset the lowering of private sector saving rates due to the increasing proportion of the community that is becoming eligible for various forms of government assistance. Such increased assistance is operating to reduce the private incentive to save and, by adding to taxation levels, it has reduced individuals' capacity to do so. (The preferable course would be to reduce the eligibility for such assistance and to confine it largely to those on low incomes. However, that will take some considerable time to achieve). (2)
Since the early 1970s the proportion of "income units" (3) reliant on personal benefits from the government for their main source of income has approximately doubled to over 26 per cent and the proportion of household disposable income from personal benefit payments has more than doubled to 20 per cent. Yet this has occurred over a period when average real household disposable income per head increased by more than 40 per cent, which implies a reduced need for government assistance -- that is, as the standard of living increases we could reasonably assume that the proportion of the population requiring government assistance might diminish. (4)
Household Disposal Income -- Personal Benefit Payments (a)
| Household Disposable Income $M | Personal Benefit Payments (a) $M | % Household Disposable Income % | Real Household Disposable Income Per Head $ | |
| 1971-72 | 25,648 | 2,195 | 8.6 | 9,809 |
| 1976-77 | 58,331 | 7,561 | 13.0 | 11,610 |
| 1982-83 | 114.850 | 16,167 | 14.1 | 12,092 |
| 1986-87 | 168,185 | 24,887 | 14.8 | 12,596 |
| 1990-91 | 245,699 | 37,150 | 15.1 | 13,538 |
| 1993-94 | 279,114 | 49,198 | 20.0 | 14,079 |
(a) To residents. Does not include benefits from free or subsidised governments services such as Medicare.
There seems little doubt that a substantial proportion of this increase in personal benefit payments, and in the extension of free or subsidised government services, is primarily a function of "vote buying" by politicians seeking to compete for being the most "compassionate". Indeed, as former Labor Finance Minister, Peter Walsh, has pointed out, a "compassion industry" has been created which puts enormous pressure on politicians by purporting to represent the interests of low-income groups. In reality, this industry (sic), by pressing governments to go on expanding benefits and free or subsidised services and by paying scant regard to the desirability of confining eligibility to those who are in real need, not only detracts from the interests of low-income groups but undermines the performance of the economy. Yet even though this "middle-class welfare" syndrome involves a good deal of unnecessary "churning", (5) once established it requires considerable political resolve to break down because the withdrawal of benefits is politically difficult.
An associated point is that, as a "structural" budget surplus would be likely to reduce Australia's overall need to call on external savings to finance growth, there would be benefits from lower interest and/or dividend payments to overseas investors. That is, there are some potential advantages in Australians' financing a higher proportion of economic development from their own rather than foreign savings. (This is not to argue for increased restrictions on foreign investment, of course.)
The importance of reducing the draw on external savings by moving to a structural budget surplus is greatly enhanced given that the Commonwealth deficit is predominantly being used to finance consumption spending: while there could be justification for the Government to finance capital spending by (in effect) borrowing overseas, it is surely a recipe for achieving banana republic status to be doing so to finance consumption. Yet, over the five years to 1994-95 inclusive, the Commonwealth will have accumulated a deficit on its general government sector's current account amounting to about $25 billion. This is in striking contrast to the experience of the early 1980s when the Commonwealth deficit was entirely on capital account (and when the current external account deficit was manageable, particularly given the much lower level of net foreign liabilities).
Thus, there is a strong case for the Commonwealth to move as quickly as possible to a budget surplus, and to endeavour to maintain a substantial ongoing surplus position other than in times of recession, when it would be appropriate to allow the natural decline in revenue and natural growth in expenditure to be "absorbed" in a lower surplus or even a small deficit. A desirable short-term target might be a budget surplus in 1996-97 of 2 per cent of GDP, or about $10 billion. A surplus of such a size would only be about the same as in 1988-89 and 1989-90.
IS THE BUDGET ALREADY ON TRACK TO ACHIEVE AN ADEQUATE SURPLUS?
While the 1994-95 Budget projections show a small deficit of 0.4 per cent of GDP for 1997-98, Government Ministers have suggested that the projected progressive reduction in the deficit from this year's 2.5 per cent of GDP shows that the budget is "on track" to achieve a surplus before the end of the century. Indeed, the recent lift in the rate of economic growth (6) -- which adds to net revenue and which could reduce this year's deficit to around 2.2-2.3 per cent of GDP, or about $10-10.5 billion compared with the original estimate of $11.7 billion -- has led the Treasurer to imply that a budget surplus could be achieved within the next couple of years, even without policy action.
However, while the 1994-95 budgetary outlook has undoubtedly improved, that does not necessarily imply a corresponding improvement in later years. The budget projections for economic growth of 4.25 per cent in 1995-96 and 4 per cent in each of the next two years now look even more optimistic than they did at the time. Clearly, they make insufficient allowance for the certain slowdown as Australia now approaches "full capacity" quicker than envisaged, let alone the possibility of another recession. Private sector forecasters are now starting to project a slowing in the rate of growth from about mid-1995 as the economy starts to run into capacity constraints and as the policy measures taken to date, and those now clearly in prospect, begin to bite. Such forecasters recognise that once the economy reaches capacity it is unlikely to grow faster than 3-3.5 per cent per annum without further substantial micro-economic reforms. Access Economics, for example, is forecasting only 3.5 per cent growth in 1995-96 and it is projecting that, without policy changes and assuming continued low inflation, the budget may not turn in a surplus until 1998-99.
Past experience is also relevant in assessing the prospects of achieving budget expenditure projections. Thus, if we examine the changes made in the estimates for 1994-95 over the three Budgets since the last Hawke Government one in August 1991, the following picture emerges:
Estimated Outlays for 1994-95
| $ billion | |
| In 1991-92 Budget | 111.1 |
| In 1992-93 Budget | 118,3 |
| In 1993-94 Budget | 121.7 |
| In 1994-95 Budget | 123.0 |
These figures show that, since taking office, Mr Keating has presided over a large increase of nearly $12 billion in the estimates for outlays in 1994-95. In this year's Budget alone, new policy decisions added some $1.7 billion to outlays in 1994-95 and $6 billion over the next three years. Those additions came on top of last year's supposedly "tough" budget -- in fact only "tough" in increasing revenue -- which added an extra $2 billion to this year's outlays and $6 billion over the same three years.
New policy decisions since the 1994-95 Budget was brought down in May have already added some $490m to expenditure over the next four years. (7) This is before the Government even considers spending proposals such as those in the recent report of the National Council for the International Year of the Family for a raft of new or expanded programmes purporting to assist families. Particularly with an election coming up, the Government seems certain to make net additions to spending unless there is a turnaround in Ministerial attitudes.
If there were to be a similar blow-out, in relative terms, in the estimates for 1997-98 in the next three Budgets as there has proved to be in the original estimates for 1994-95, outlays would become an even higher proportion of GDP than they are now estimated to be and the budget deficit would be about $15 billion, or 2.6 per cent of GDP, higher than now projected for 1997-98 (0.4 per cent of GDP).
HAS THE GOVERNMENT ALREADY "CUT EXPENDITURE TO THE BONE"?
The Prime Minister has consistently claimed that the Commonwealth has cut this or that amount out of the budget over this or that period; and that there is no or only very limited scope to cut spending further. To support such assertions, reference is often made either to the level of Commonwealth outlays in the last year of the Fraser Government (1982-83) or to the forward estimates, viz.,
Commonwealth Budget Outlays (% of GDP)
| 1981-82 | 26.2 |
| 1982-83 | 28.8 |
| 1994-95 (est.) | 26.2 |
| 1995-96 (projection) | 26.0 |
| 1996-97 (projection) | 24.9 |
| 1997-98 (projection) | 24.2 |
On this basis it is often suggested that Commonwealth outlays will soon be back close to the levels of the early 1970s, when they were around 23 per cent -- "the low 20s", as Mr Keating sometimes refers to them.
Such claims are inaccurate and misleading. In the first place, a comparison of Commonwealth outlays now with such outlays in the early 1970s is not a comparison of like with like. In the early 1970s the Commonwealth undertook significant borrowings on behalf of State Governments, and the advances of these borrowings to the States appeared in the Commonwealth's accounts as Commonwealth outlays. Today, however, not only are such borrowings undertaken by the States themselves but they are also actually repaying all earlier borrowings as they fall due -- and such repayments are deducted from Commonwealth outlays. In 1994-95, for example, such repayments to the Commonwealth are estimated to total about $1.9 billion, or about 0.4 per cent of GDP. The overall effect of this change in borrowing arrangements is to reduce Commonwealth outlays in 1994-95 by around $8.0 billion or about 1.8 per cent of GDP by comparison with (say) 1971-72. (8) Hence, on a comparable basis with the early 1970s, total Commonwealth budget outlays are closer to 28 per cent than 26 per cent of GDP, or 5 percentage points higher than the 23 per cent in 1971-72.
Secondly, whereas there were no significant asset sales in the 1970s or early 1980s, the Commonwealth is now undertaking a programme of major asset sales, estimated to yield $2,450m in 1994-95, or about 0.5 per cent of GDP. These asset sales are not, however, treated as a revenue item but as a deduction from outlays. The net effect, therefore, is to make ongoing outlays in 1994-95 appear to be 0.5 per cent of GDP lower than in those earlier years.
Thirdly, to the extent that there has been a reduction in Commonwealth outlays under the Hawke-Keating Governments, it has been concentrated in reduced payments to the States, not in outlays by the Commonwealth for its own purposes. Thus, if we go back to the last Budget of the Fraser Government in 1982-83 -- a budget whose expenditure levels Prime Minister Keating has frequently (and rightly) criticised as being irresponsible and primarily designed for electioneering -- we find that Commonwealth own-purpose outlays were then 18.0 per cent of GDP. In 1994-95 they are estimated to be 20.1 per cent of GDP excluding asset sales (the proceeds of which are deducted from outlays). This is equivalent to about $10 billion of additional spending (in today's dollars).
The following comparison between the 1982-83 Budget outcome and the 1994-95 estimates shows that the Hawke-Keating Labor Government has effectively used cuts in payments to the States to finance not only a substantial increase in its own-purpose outlays in areas such as health, social security and welfare, and labour market assistance programmes but also to finance reductions in revenue. Of particular interest is the fact that while the burden of Commonwealth taxation has fallen by 1.1 percentage points of GDP since 1982-83, the burden of State taxation has increased by 1.3 percentage points of GDP over the same period, so that the overall burden of taxation has actually increased slightly as a result of the Commonwealth effectively passing the tax buck to the States. (9)
A comparison with 1982-83 is also of interest because the final budget deficit of 2.6 per cent of GDP in that year of recession was about the same as is the Keating Government's estimated deficit for 1994-95, which is four years after the 1990-91 recession. Four years after the 1982-83 recession, the budget deficit in 1986-87 was down to 1.0 per cent of GDP, which proved to be a totally inadequate tightening of fiscal policy.
Contribution To Commonwealth Budget Deficit
Change Between 1982-83 And 1994-95 (est.) (Percentage points of GDP)
| Payments to/for other Governments | -3.5 |
| Own Purpose Outlays | +1.5 |
| Taxation Revenue | +1.1 |
| Other Revenue | +0.9 |
| Deficit Change | - |
Of course, the recovery has been much slower this time around and unemployment is only now back to about the average level in 1982-83. This, however, serves to emphasise that the Commonwealth Government cannot claim that the higher level of its own-purpose outlays compared with 1982-83 is due to greater "recession" effects. In fact, the average level of unemployment estimated in the 1994-95 Budget is only slightly higher than the average in 1982-83: 9.75 per cent compared to 9.0 per cent. This accounts for budgetary spending of only about 0.25 per cent of GDP, or just over $1 billion of the increase in estimated own-purpose outlays. Finally, as Mr Keating's strong criticisms of the 1982-83 Budget implied that he rightly considered its expenditure levels to have been too high, he should also be prepared to acknowledge that the Commonwealth's own-purpose outlays today should be below the 18.0 per cent of GDP they were in 1982-83.
The following comparison between Commonwealth own-purpose outlays in 1982-83 and the 1994-95 estimates indicates the main areas where such expenditures have increased. It also brings out that the "problem areas" are those which have involved the extension of government assistance beyond lower-income groups, that is, in education, health and social security and welfare in particular, and in the growing public debt interest bill which is itself the product of large and persistent deficit financing policies.
Commonwealth Budget -- Own-Purpose Outlays (a) -- % GDP
| 1982-83 | 1994-95 (est.) | Increase/Decrease | ||
| Percentage Points | % | |||
| Defence | 2.6 | 2.1 | -0.5 | -18 |
| Education | 0.4 | 0.8 | +0.4 | +123 |
| Health | 1.8 | 2.7 | +0.9 | +48 |
| Social Security/Welfare | 8.1 | 9.3 | +1.2 | +14 |
| Housing/Community Amenities | 0.2 | 0.1 | -0.1 | -66 |
| Culture/Recreation | 0.3 | 0.3 | - | +14 |
| Transport/Communications | 0.5 | 0.1 | -0.4 | -76 |
| Industry Assistance/Development | 0.8 | 0.7 | -0.1 | -2 |
| Labour/Employment | 0.3 | 0.8 | +0.5 | +162 |
| Other Economic/Legislative Services | 0.2 | 0.2 | - | -30 |
| Law Order/Public Safety | 0.2 | 0.2 | - | -13 |
| Foreign Affairs/Aid | 0.6 | 0.5 | -0.1 | -20 |
| General/Scientifie Research | 0.3 | 0.2 | -0.1 | -32 |
| Administrative Services | 0.8 | 0.8 | - | -8 |
| Interest (b) | 1.1 | 1.6 | +0.5 | +49 |
| Contingency Reserve | - | -0.1 | -0.1 | n.a. |
| Asset Sales | - | -0.5 | -0.5 | n.a. |
| Total | 18.0 | 19.5 | +1.5 | +9 |
| Total, Excl. Asset Sales and Contingency Reserve | 18.0 | 20.1 | +2.1 | +12 |
(a) Own purpose outlays excludes only payments to or for other governments; in other words, payments to Commonwealth trading enterprises are not excluded.
(b) Excludes interest paid in respect of Commonwealth securities issued on behalf of the States.
DOES AUSTRALIA ALREADY HAVE "SMALL GOVERNMENT"?
Opponents of reducing government expenditure frequently point out that, among OECD countries, Australia has one of the smallest government sectors when measured by taking the proportion of GDP allocated to government spending. Thus, OECD figures for 1993 put total general government outlays for Australia at 38.6 per cent of GDP, about 3.4 percentage points below the OECD average. Of the 19 OECD countries surveyed, only the United States (34.4 per cent) and Japan (34.0 per cent) have lower proportions.
A number of points need to be made about such comparisons:
- While in most OECD countries total government spending is a higher proportion of GDP than in Australia, this does not mean that our education, health and other services are necessarily suffering. Higher government spending in other OECD countries usually simply reflects the fact that less of a particular function is provided through the private sector in those countries than in Australia. This is particularly true of superannuation where the superannuation guarantee charge (SGC) arrangements have kept compulsory retirement provisions out of the public accounts in Australia whereas they form part of public sector expenditure in European and North American countries. The SGC is now equal to 6 per cent of wages and salaries, or about 3 per cent of GDP, and that is one illustration of this effect, which is also relevant to services such as education and health. In fact, total Australian spending (that is, both government and private) on such services is broadly in line with total spending in other countries with comparable income levels.
- An important benefit from having a greater proportion of services provided by the private sector is that it reduces the adverse effects of taxation on productive effort, and on saving and investment. This helps to encourage economic activity and employment. A further benefit is that, as a general rule, the private sector tends to provide a more efficient and higher quality service than does the government. There also tend to be fewer cross-subsidies and, hence, less distortion of resources. Far from "worrying" about the small size of the government sector, we should be flaunting its benefits and looking for ways to reduce it further.
- The economies of those OECD countries with large government sectors have not performed well in recent years, particularly in regard to employment growth. It is now widely acknowledged that important contributing factors have been the adverse effects on incentives to work and to save from higher transfer payments and from the concomitant rise in the burden of taxation. (10) As put in one recent OECD report, "The cause of Europe's high level and duration of unemployment is no mystery. There are insufficient incentives for employers to offer employment and insufficient incentives for employees to accept many of the jobs that are offered". (11) Many OECD countries are now seeking to cut back on welfare spending on both economic and social grounds. The new (left-of-centre) Swedish Government, for example, has recently announced cuts in government outlays of about 12 per cent of 1994 GDP over 4 years.
- More fundamentally, given our place in the world and the pressing need to render Australia a more competitive player in Asia, a more appropriate comparison might be with some of the Asian countries whose economic performance has been so much better than that of most OECD countries. Those countries have significantly smaller government sectors -- generally below 30 per cent of GDP -- as indeed Australia had during most of the 1950s and 1960s when our overall economic performance was better than it has been since. (12)
- Apart from keeping taxes low, there is also a good deal to be said on social grounds for concentrating government social security and associated assistance on those most in need rather than providing universal benefits, as tends to be the case in most other OECD countries. Middle- and higher-income groups should generally be expected to take care of themselves, and we are likely to have a better society if they do so.
- While Australia has a lower proportion of general government outlays to GDP than in most OECD countries, our government trading enterprise sector is one of the largest relative to GDP. Although there has been a marked improvement in the performance of this sector in recent years, it still operates well below international best practice in most cases. This has adverse effects on the rest of the economy, particularly on business costs and business investment.
SHOULD TAXES BE INCREASED RATHER THAN EXPENDITURES CUT?
Government Ministers are spreading the word that, if analysis of the economic outlook indicates a need to take policy measures to reduce the budget deficit, the required net savings should come from tax increases rather than expenditure cuts. The impression which Ministers are seeking to convey through the media is that, as expenditure has already been "cut to the bone" and as "Australia already has one of smallest government sectors", there really is "no alternative" but to increase taxes.
The underlying rationale for such an approach is basically flawed once it is understood that, as pointed out above, neither of these propositions stands up to closer analysis. But there is a further important point which is all too often overlooked, viz., the costs of additional taxation, or the so-called "deadweight losses", which tend to increase proportionately with increases in rates of taxation.
A recent study (13) estimated that, in New Zealand, for every additional dollar raised from labour (or income) taxation the deadweight loss increases by 18 cents, in other words, national income falls by 18 cents. To put it another way, at the margin, government projects would have to earn at least an 18 per cent real return to be of net benefit to New Zealanders -- a tall order! An earlier similar study of Australia (14) found the deadweight loss to be between 23 cents and 65 cents depending on which taxes were involved.
The New Zealand study estimated that, since 1972, the deadweight losses from labour taxation have risen from 5 cents to 18 cents and from consumption taxation from 5 cents to 14 cents. This partly reflects the higher tax rates required to finance greater government outlays. However, the study also found that increasing mobility of labour and capital accounted for most of the increase in deadweight losses over the past 20 years -- the more mobile the resources, the more damage done by taxes in discouraging movement to their highest-valued uses.
These high deadweight losses from taxation at existing rates confirm the commonsense view that there would be considerable benefits from reducing the overall burden of taxation and concentrating government spending in areas where there is a clear social benefit or need. It suggests, in particular, that "churning" involves a considerable net reduction in living standards.
There is, thus, a strong economic argument for not increasing further the present burden of Commonwealth taxation, which the 1994-95 Budget papers projected to increase by "only" 1.1 percentage points of GDP between 1993-94 and 1997-98, based largely on the projections of strong economic growth "reflecting expectations that the economy will remain buoyant during the projection period". According to the Budget papers, however, the "natural" growth in revenue is not expected to be as fast as in the 1980s due to lower inflation (and, hence, less bracket creep) and the continued relative narrowing of the indirect tax base as consumption of goods subject to tax grows relatively slowly. (There has been a significant broadening of wholesale sales taxes, though.)
It should also be noted that Prime Minister Keating promised, on 19 December 1992, to "not put up tax". He and other Government Ministers subsequently indicated that this was intended to mean that the Government would not raise the burden of Commonwealth taxation (per cent of GDP) during its present period in office. Indeed, the Government's election programme included a promise to cut income taxes by about $7 billion in 1996-97. However, only about half of those income tax cuts has been delivered. (15) Moreover, the Government's own projections of tax revenue and GDP imply that, by comparison with 1992-93, there will be an increase in the tax burden. The economic case for not increasing taxes is thus strongly reinforced by the case for requiring politicians to hold to their promises.
Some argue, nonetheless, that reducing the deficit is of such importance that increasing taxes would be "better than doing nothing". However, while such an approach might be justified in a "crisis" situation (such as in a war or in the event of a political deadlock that occurred after the Government had made genuine but unsuccessful efforts to secure Parliamentary approval to expenditure reductions), no such situation exists and no genuine effort has been made to secure a programme of expenditure cuts. Conceding the case for increasing taxes would thus simply be a means of letting the Government off the hook of electoral promises and would, in effect, concede that a forward estimate of expenditure in 1995-96 of no less than $128.5 billion could not be substantially reduced.
Total Commonwealth Tax Revenue
| Tax $ million | GDP(I) $ million | % GDP(I) % | |
| 1991-92 | 87,824 | 387,264 | 22.7 |
| 1992-93 | 89,234 | 403,719 | 22.1 |
| 1993-94 | 93,774 | 426,297 | 22.0 |
| 1994-95 (est.) | 103,325 | 455,498 | 22.7 |
| 1995-96 (est.) | 113,600 | 485,560 | 23.4 |
| 1996-97 (est.) | 122,100 | 520,035 | 23.5 |
| 1997-98 (est.) | 129,900 | 567,667 | 22.9 |
Note: GDP(I) figures are those published in the September Quarter 1994 national accounts to 1993-94, then assuming that rates of growth are the same as protected in Budget Paper No. 1 for 1994-95.
EXPENDITURE SAVINGS
The forward estimates in the 1994-95 Budget papers provide for a slower real growth (excluding asset sales) than has been the case in recent years. Excluding major asset sales, total outlays in 1997-98 would only be 2.25 per cent higher in real terms than in 1994-95.
Budget Outlays
| Total | Excl. Major Asset Sales | |||||
| $ bn | Real Growth % | % GDP | $ bn | Real Growth % | % GDP | |
| 1994-95 (est.) | 120.7 | 3.1 | 26.2 | 123.1 | 2.9 | 26.8 |
| 1995-96 (est.) | 127.9 | 3.2 | 26.0 | 128.5 | 1.6 | 26.1 |
| 1996-97 (est.) | 131.6 | -0.1 | 24.9 | 132.6 | 0.2 | 25.1 |
| 1997-98 (est.] | 136.7 | -0.9 | 24.2 | 137.1 | 0.4 | 24.2 |
However, as noted, the forward estimates make no allowance for any significant slowdown in economic activity, let alone a recession, between now and 1997-98. They also make no allowance for the cost of new spending proposals. While such proposals formally have to be offset by expenditure savings, past experience suggests that they often involve major net additions to the expenditure base.
It might be noted that, in the 1993-94 Budget, the Government put in train a wide ranging programme of reviews. As the 1994-95 Budget papers put it: "Extending the normal program evaluation activity and taking account of an analysis of outlays trends across all portfolios together with Ministers' own reviews of their portfolio priorities, the reviews have focused primarily on areas which have been subject to rapid outlays growth in recent years or which for other reasons are seen as offering scope for program improvements".
Areas in which review outcomes have been taken into account in the 1994-95 Budget include:
- AUSTUDY compliance procedures;
- the delivery of veterans' entitlements;
- areas of substantial outlays growth in the health area;
- nursing home efficiency gains and structure of funding;
- the contribution of tourism to the economy and private-sector funding for the Australian Tourist Commission;
- ABC and SBS funding;
- Commonwealth law enforcement arrangements, including the role and functions of relevant agencies and ways of maximising cooperative effort;
- the Commonwealth Government's overseas and domestic property arrangements;
- National Corporate Regulation Scheme administration;
- environment, natural resources management and energy programmes; and
- ABS population census frequency.
Further reviews have been commissioned and will report over the next two years. However, it is apparent that "in-house" reviews of this type are fiddling at the edges and do not result in the sort of public accountability which is needed if the costs and benefits of the major Commonwealth programmes are to be properly taken into account in public debates.
A number of State Governments have benefited from the appointment of independent Audit Commissions to examine and report on expenditure programmes and the efficiency of trading enterprises. Particularly as the last independent review of Commonwealth expenditures was undertaken as long ago as 1973 (the Coombs Task Force), the Commonwealth should appoint a panel of independent and qualified people to constitute an Audit Commission to evaluate Commonwealth expenditure. The terms of reference for such a Commission should be carefully drawn up to ensure that the brief includes an assessment of the underlying objectives of expenditure programmes, whether those objectives are being met and whether alternative approaches would be preferable.
SOCIAL SECURITY
Major Programmes
| 1982-83 | 1994-95 (est.) | |||
| $m | % GDP | $m | % GDP | |
| Assistance to Aged | 4,969 | 2.86 | 12,536 | 2.79 |
| Assistance to Veterans/Dependants | 1,709 | 0.99 | 4,026 | 0.89 |
| Assistance to People with Disabilities | 1,190 | 0.69 | 5,119 | 1.14 |
| Assistance to Families with Children | 2,649 | 1.53 | 10,432 | 2.32 |
| Assistance to Unemployed/Sick | 2,520 | 1.45 | 7,622 | 1.69 |
| Total (incl. other programmes) | 14,197 | 8.18 | 43,449 | 9.65 |
In considering the economic effects of social security assistance it is important to keep in mind that many beneficiaries are also eligible for a range of free or subsidised government services, covering medical, hospital, housing, pharmaceutical, transport services and the like. This adds considerably to the anti-savings and anti-employment bias which is already particularly strong in the social welfare area, because the incentives to save and work are eroded by the extension of government assistance to an increasing proportion of the population. It encourages the attitude -- why save, and why try for a job, when the State will look after you if you don't? The fact that social welfare is now double the proportion of GDP that it was in the early 1970s has almost certainly contributed importantly to the decline in private sector saving rates (which have not been offset by any increase in public sector saving rates -- indeed, rather the contrary) and to higher unemployment rates.
The problem is that social security is particularly susceptible to the politics of compassion and of interest groups, and to decision-making related to single issues rather than an examination of the whole picture. Once benefits are extended to a group, moreover, it becomes difficult to withdraw them or scale them back.
Spurred on by the Year of The Family, politicians have recently been falling over themselves to think up schemes to support "the family", and, in typical fashion, have sought to count so many groupings as "families" as to make the term almost meaningless. While the traditional family is an institution which I strongly support, this ought not to mean the extension of government assistance to all manner of groupings or for all sorts of purposes, let alone regardless of the circumstances of such groupings. The problem is illustrated by the fact that assistance to "families with children" is presently estimated to reach almost $14 billion in 1997-98 compared with around $9 billion in 1993-94 and less than $7 billion as recently as 1991-92. This raising of the family to the status of a political icon has to a large extent undermined the earlier efforts of the Hawke-Keating Government to improve targeting of benefits in some areas, which kept the proportion of GDP going to social welfare relatively stable during the 1980s. Thus, social welfare is now taking a significantly higher proportion of budget outlays and GDP than in 1990-91, let alone 1982-83.
| Outlays % | GDP % | |
| 1972-73 | 20.7 | 4.69 |
| 1976-77 | 26.4 | 7.29 |
| 1982-83 | 28.7 | 8.18 |
| 1986-87 | 27.2 | 7.85 |
| 1989-90 | 30.0 | 7.19 |
| 1990-91 | 31.8 | 8.09 |
| 1992-93 | 35.1 | 9.47 |
| 1994-95 (est.) | 36.0 | 9.65 |
The increase between the recession year of 1982-93 and 1994-95 (est.) is particularly worrisome given that the economy must clearly be regarded as out of recession in 1994-95. That increase has effectively added $6.7 billion to 1994-95 estimated outlays. It suggests that, if the alarming upward drift is to be halted, let alone reversed, there will need to be a much more determined effort to implement structural reform of the system. The emphasis would need to be on a marked reduction in eligibility for benefits, rather than reductions in benefits per person (which have, however, been increasing in real terms and which need to be reviewed given the interaction which exists with the labour market). The following highlights changes in recipients of major benefits, and in the average benefit, since 1982-83.
Average Benefit Payments (per annum) And Beneficiaries
| 1982-83 | 1993-94 | % Increase | ||||
| (000s) | $/Hd | (000s) | $/Hd | (000s) | $/Hd | |
| Age Pensioners (a) | 1,417 | 3,180 | 1,554 | 7,351 | 10 | 27* |
| Invalid Pensioners (b) | 277 | 3,851 | 422 | 7,444 | 52 | 6* |
| Unemployment Beneficiaries (c) | 536 | 4,200 | 916 | 8,382 | 71 | 10* |
| Sole Parent Pensioners | 124 | 5,838 | 314 | 8,047 | 153 | 24 |
| Child Care Fee Relief (d) | n.a. | n.a. | 209 | 2,380 | n.a. | n.a. |
| Families (Family Payment) | n.a. | n.a. | 1,825 | 2,986 | n.a. | n.a. |
* Percentage increase after allowance for increase in CPI.
(a) As both full-time and part-time pensioners are included, the per head figure is not necessarily indicative of the full-time pension.
(b) Includes Disability Support pensioners.
(c) Job Search Allowance and Newstart Allowance.
(d) Excludes the new Childcare Cash Rebate which commenced on 1 July, 1994.
Note that the number of unemployment beneficiaries is usually less than the number unemployed.
Source: Department of Social Security, Annual Reports, and Budget Papers No 1 (various).
Unemployment Benefits
The number of unemployment beneficiaries (Job Search Allowance and Newstart Allowance) is still around 850,000. (16) Of those on benefits around half are on the long-term (more than 12 months) Newstart benefit. In fact, there are now more people on benefit than, according to the ABS, are actively looking for work but unable to obtain it. This suggests that there has been an easing in determinations on eligibility for benefits. (17)
Indeed, the recession and the large increase in the number of unemployed which accompanied it, meant that review procedures were oriented to be sympathetic and "soft" to the unemployed. However, the time has come to change from largely passively accepting unemployment benefit applications as constituting eligibility to ensuring that more of the unemployed are forced to engage in active job-seeking. While the unemployment rate remains relatively high, the demand for labour has been increasing strongly for some time now. Job vacancies per thousand employed in May were nearly 80 per cent higher than a year earlier and overtime hours per employee are now back close to peak 1980s levels. Unemployment rates are down to 5-6 per cent in a number of regions (the average in Western Australia is now below 8 per cent).
Accordingly, while recognising the difficulties posed by Australia's inflexible labour market relative to, say, the US, action is needed to make it much harder to qualify for and remain on the unemployment benefit.
Tighten Work/Activity Test
For one thing, procedures now need to be toughened considerably, and the increased staff taken on in the recession should be used to tighten the activity/work test and to put greater pressure on the unemployed to seek alternative jobs to those which they prefer, including in the growing number of regions where rates of unemployment are down to relatively low levels. Toughening the activity and work tests, especially in the early stages of unemployment, may provide that extra impetus needed to push people into jobs which, while they may prefer to avoid them, would reduce the burden on the taxpayer and increase national output.
Increased scrutiny and compliance enhancement for Job Search Allowance should be able to attain a 5 per cent saving on that allowance (over and above the fall to be expected on cyclical grounds), equal to $180m.
Time Limit on Benefits
More significant reform of unemployment benefits should also be commenced. The United States unemployment rate is now at 5.6 per cent (compared to our 9.3 per cent at a similar stage of recovery) and it has a 12-month limit on unemployment assistance, albeit generously interpreted. While the US has a more flexible labour market, academic analyses of other labour markets indicate that such a time limit is a significant influence on the unemployed's inclination to seek work. Imposing such a limit would produce direct savings on welfare benefits, but also savings in the merry-go-round of labour market and training programmes of dubious merit that long-term unemployed are put through, and indirect savings to the wider community as currently restless unemployed youth gain employment, or move back home to reduce their living costs. Newstart outlays on long-term unemployed are budgeted at $3.7 billion in 1994-95.
Those who experienced financial hardship as a result of ceasing to be eligible for unemployment benefits would be eligible for a Special Benefit (18) on a temporary basis. However, the conditions under which Special Benefit is payable should be reviewed in order to prevent people using it as a long-term unemployment benefit.
The phasing-in over two years of a 12-month time limit on unemployment benefits would reduce unemployment benefit numbers by over 400,000 over that period, reducing unemployment benefits payments by about $3.5 billion per annum. While there would likely be a considerable offsetting increase in Special Benefits, the fact that the eligibility test for such benefits is "tougher" should make it possible to save at least 30 per cent of this amount (about $1.0 billion) by such action.
Increased Benefits Waiting Periods
The Government also needs to ensure that unemployment benefits (Job Search Allowance) and its close substitute (Sickness Allowance) are not considered an automatic first stop for jobseekers. There is currently only a one-week waiting period for these benefits (except for school leavers who are subject to an extra 12 weeks). This period should be extended to at least three weeks. Special Benefits would be available to those in immediate need of assistance. This three-week period would provide a net saving (after allowance for Special Benefits costs) of at least $100m on Job Search and an extra $50m on Sickness Allowance.
Removing the four-week limit on the Liquid Assets Test
Raising the current four-week deferment on benefits eligibility for those in excess of the Liquid Assets Test provisions would mean that those who have large redundancy payments or other liquid funds, but otherwise qualify for benefits, would have to wait longer (dependent on the value of those liquid assets). Removal of this cap would require individuals to use up a part of their redundancy payments (which exclude rolled-over superannuation) -- the purpose for which they are paid -- before becoming eligible to receive JSA. Saving: $100m.
Benefits for Migrants
Department of Social Security figures show that, as at May 1994, over 41,500 recently arrived migrants (2 years or less Australian residency) were in receipt of social security benefits (excluding Aged Pensions -- dealt with later -- and Special Benefits). Australia is often regarded overseas as an easy welfare ride and there are insufficient incentives to encourage potential migrants to provide for themselves. Australia is an attractive place for potential migrants from many overseas countries and we have the opportunity (and the right) to be selective.
Recognising this, the Government did introduce a couple of years ago, a six-month (residency) qualifying period for migrants to be eligible to receive benefits. This is estimated to have saved $30m in unemployment benefits alone per year. As a further step in that direction, the qualifying period should be increased to two years for non-refugee immigrants. Such an extension would help improve the quality of migrants, particularly in regard to English-language skills (the lack of which accounts for a quarter of long-term unemployed), and would tend to discourage immigration by the potentially non-productive. Savings in unemployment (and related) benefits from this measure would be $350m per annum.
Sole Parent Pensions
For sole parents, Australia offers one of the most generous pension schemes in the world and, for those sole parents who are separated from their spouses, the Government operates an expensive Child Support Agency to collect maintenance. The USA provides pension support only for the first 12 months of a child's life, while even cradle-to-grave welfare social democracies like Sweden grant assistance for only 3 years. Australia, however, provides income support for up to 16 years.
There is a striking contrast between the amount of government assistance to sole parents -- over $2.7 billion per annum to 300,000 sole parents -- and the amount provided to families through the Basic & Additional Family Payment -- some $5.7 billion ($3.7 billion to low-income families) to 1.9 million families covering 3.8 million children. Sole parents receive an average of around $9,000 per annum compared with around $3,000 per annum per family.
Given that the Government also collects maintenance, provides generous child care support and family assistance for a working parent, the length of support is inappropriate and provides only limited incentive towards more responsible behaviour. Prolonged welfare payments also serve to take the parent out of the workplace, thereby accentuating any loss in employment skills and hence adding to the difficulty in regaining work.
A tougher (but still compassionate) policy would be to cut eligibility to where the youngest child is 6 or less (only around half of current Sole Parent Pensioners). With appropriate safety-net and phase-out arrangements, this would save at least $1 billion a year (net) (19) by 1996-97.
Age Pension
Means- and asset-tested age pensions constitute the largest single item of expenditure in the Budget at almost $12 billion, and the Government also provides assistance for retirement through generous tax concessions on superannuation as well as by requiring employers to fund contributions to superannuation funds for their employees.
With the rapid improvement in health over the past 10-15 years, and the accompanying increase in life expectancy, it is reasonable to expect that people should work for longer, or at least that others should not have to start providing them with retirement assistance until a later age. Indeed, with the compulsory retirement age being removed, the Government should be encouraging those people able, active and willing to work to continue doing so as long as they like. Yet the pension age is now over 12 years less than the average life expectancy for men and 22 years less for women. It is not in the interests either of taxpayers or of older people themselves to encourage what amounts to "early retirement".
Moreover, as superannuation accumulates from the compulsory levy, the Government should be able progressively to reduce its direct Budget contribution to retirement.
Uniform Pension Age
With women living an average of 5 years longer than men, and taking a more active role in the workforce, there is certainly now no justification for the continued discrimination on age eligibility for age pensions. Men do not receive an age pension until age 65, whereas women currently become eligible at age 60. (Some men who have been currently unemployed for more than 2 years, but who have not yet reached the age of 65, are however now being granted a de facto "age" pension, presumably to reduce the number of unemployed as measured. There are now about 34,000 recipients of this "mature age" pension, a move which is entirely in the wrong direction.)
While the age for women is being progressively increased to match the age for men at 65, under the Government's current proposal this equality will not be achieved for 20 years. A faster narrowing of the age gap over 5 years, with those currently 59 having to wait 2 years, those 58 having to wait 4 years, those 57 having to wait 6 years, ..., would save at least $150m per annum by 1996-97 and over $300m by the end of the 5-year period.
Action should also be foreshadowed that, when aligned, the age for pension eligibility for all Australians would be gradually increased to 70. This move would help to cap the growth in pension payments and, within 10 years, savings could be over $1 billion a year. This should also encourage greater voluntary retirement contributions, thus contributing to the national saving task. (Corresponding changes would probably also be needed to superannuation arrangements to prevent double-dipping.)
Deferred Pensions
A deferred pension scheme which granted increased pension benefits in lieu of extra years of work/deferment to entitlement could save considerable money with an ageing population. A bonus rate of (say) 7 per cent per year of deferment, assuming an average two-year deferment for 25 per cent of newly eligible pensioners, would save $250m per annum after a couple of years and this saving would grow over time.
Enforcement of Age Pension Residency Requirements
Under present law a minimum of 10 years residence is required for eligibility for the retirement pension. However, the Department of Social Security has been effectively flouting the law by granting Special Benefits in lieu of aged pensions to aged people who have not been Australian residents for 10 years. Recent figures released by the Department revealed that almost 23,000 migrants who arrived in Australia after 1985 were receiving this benefit last year. The full intention of the law should be enforced and 10 years residency should be required for retirement pensions. This would save over $150m.
Suspension of Automatic Indexation
With inflation now under 2 per cent and unlikely to take off in the near future, there is a reasonable assurance of a low inflation environment for some time. One contribution to maintaining such an environment -- and to creating a group in the community pressuring the Government to keep inflation low -- would be to end the practice of automatic indexation of government benefits (and charges).
The biggest saving from this would come in the area of welfare benefits. These have in any case risen by greater than CPI amounts in the last few years due to a number of "one-off" benefit increases. A suspension of automatic indexation of the $42 billion of personal benefit payments (up 7.7 per cent on the year previous) would save over $900m per annum. Such suspension might continue until the pension was reduced to, say, 20 per cent of average weekly earnings (now 25.7 per cent).
Disability Support Pensions
As noted, there has been a very strong increase in the number of people on disability or invalid pensions, with the number of recipients growing by an average of 7.9 per cent per annum over 10 years. Last year they grew by 6 per cent, following an 8 per cent jump the year before -- despite supposed improvements in review activity. An important reason is that this pension is more generous than the unemployment benefit, and those in a position to do so are increasingly using it as a de facto unemployment benefit without the work test.
Much tougher review and targeting of this benefit is required. More regular reviews of those pensioners with lower impairment rates would ensure the speedy return of these people to the workforce, or at least the cessation of eligibility to this pension. Changes by the State Government in Victoria to its WorkCare system have markedly increased the return-to-work rate and reduced the number of claims incidents. The failure of the Commonwealth to take similar action in regard to the administration of the disability pension scheme is adding to Commonwealth pension payments. Even a meagre 3 per cent cancellation rate, achieved through targeted increased review and more frequent medical checks, would save $100m.
Align DSP Payment Rates with JSAINSA Rates
Disability Support Pension (DSP) payment rates are the same as Age Pension rates, both of which are more generous than the unemployment benefits rate. As the DSP is often used as a substitute for unemployment benefits it should be paid at those rates. Aligning payment rates to JSA/NSA levels would only affect singles without dependants (couples already have an aligned rate) in receipt of the DSP and would reduce their payment from around $318 to $294 per fortnight. This measure would save around $60m.
Child Care
In a "classical" response to interest group pressures, politicians have been buying votes by expanding taxpayer-funded child care in much the same way as they did in the early 1980s with publicly-funded "free" health care. As recently as 1989-90 child care funding was $215m. In 1994-95, it is estimated at a whopping $960m, and is projected to reach $1.3 billion by 1997-98. The "economic" rationale sometimes advanced for this government assistance -- that it allows the community to benefit from the output of the additional women who join the workforce -- is extremely dubious at a time when both unemployment and workforce participation rates are already at high levels. This is not to say, of course, that at least some of the expense incurred on child caring should not be treated as deductible from income earned from employment for the purpose of arriving at the assessment of taxable income.
Publicly-funded child care, whether through fee relief, rebates, or operating subsidies has developed, however, into an insidious form of politicised middle-class welfare: the Budget papers openly acknowledge that assistance is for "low and middle income" families. And the Prime Minister's decision not to include a means test with the new $150m cash rebates scheme (nothing less than a bribe/pay-off to the femocrats inside and outside his office) means that the "upper classes" are also benefiting! (Even a means test on the cash rebates along the lines of the Family Allowance would have saved $30-$40m per year.)
The publicly-funded child care sector is overly bureaucraticised and highly inefficient. A recent EPAC seminar brought forth a number of scathing criticisms of the government's hotch potch approach and of the public-sector child care system in particular. Considerable savings could be achieved by providing child care through a voucher system. This would introduce a more competitive and more level playing field instead of the present arrangements discriminating against the private sector.
More generally, assistance should be provided by way of tax rebates. Assistance to people to meet child care expenses should be based on whether they are an expense necessarily incurred in the course of earning income. If a rebate was struck at 25 cents in the dollar and claimed through the tax system, and other fee relief was abolished, the taxpayer could save up to $500m.
Rent Assistance
In the One Nation statement the Government abolished the rent assistance waiting-period "due to the recession". This decision goes against the grain of reforms to target better welfare to the most needy. This decision should be reversed, saving around $40m based on estimates made when the decision was announced.
| Summary | $m |
| Unemployment Benefits | 1,380 |
| 3 Week Benefit Wait | 150 |
| Removal Liquid Assets Cap | 100 |
| Migrant Benefits | 350 |
| Sole Parents | 1,000 |
| Uniform Age Pension Age | 150 (a) |
| Suspension of Indexation | 900 |
| Deferred Pension | 250 |
| Age Pension Residency | 150 |
| Disability Support Pension | 100 |
| Align DSP payment rates | 60 |
| Child Care | 500 |
| Rent Assistance Waiting Period | 40 |
| Total | 5,130 (a) |
(a) Moving to 70 as the uniform age for pension eligibility would yield additional savings of about $1 billion p.a. (in 1994-95 prices) within 10 years.
HEALTH
Major Programmes
| 1982-83 | 1994-95 (est.) | |||
| $m | % GDP | $m | % GDP | |
| Medical Services/Benefits | 1,031 | 0.59 | 6,670 | 1.46 |
| Hospital Services/Benefits | 1,792 | 1.03 | 5,340 | 1.17 |
| Pharmaceutical Services/Benefits | 508 | 0.29 | 2,126 | 0.47 |
| Nursing Home Subsidies and Domiciliary Care Seivices | 857 | 0.49 | 2,141 | 0.47 |
| Total (incl. other programmes) | 4,417 | 2.5 | 17,276 | 3.8 |
Total Commonwealth expenditure on health stands out as the second most-rapidly growing major area of expenditure since the early 1980s: although total social security and welfare spending has also increased by 1.3 percentage points of GDP since 1982-83, the percentage increase in health expenditure (291 per cent) is much greater and is only exceeded by the increase in spending on labour market programmes. This is, of course, primarily a result of the introduction in 1983-84 of Medicare and the resultant provision of free (to the patient) medical and hospital services. As the 1994-95 Budget papers note, "from 1985-86, the first year incorporating the full cost of Medicare, to 1993-94 real growth has averaged 3.9 per cent a year. The growth over the period reflects, in particular:
- a higher utilisation of medical services and pharmaceutical benefits; and
- a drift towards more expensive medical services and more expensive drugs".
Politics aside, a rationale for the "free" provision of medical and hospital services is difficult to discover. Some argue that such services are so "essential" or so different that they should be provided free to all comers: yet food and water are, in a sense, more essential. Others argue that leaving it to "the market" to determine the demand and supply of medical and hospital services would result in inequitable outcomes and that the consumer does not have the information or the capacity to assess alternatives in a free market situation. Yet few would argue for a completely free market or that government assistance should not be provided, for example, to individuals disadvantaged by low incomes and/or chronic illness.
At a time when governments are seeking to target welfare assistance more closely it seems particularly anomalous that nothing similar of any significance is being done in the health area. As with the "free" provision of any good or service, the inevitable result of an absence of any form of charge is to put enormous upwards pressure on medical and hospital costs, both as a result of ever increasing consumer demand and because those working within the system tend to "capture" it, pushing staff and technology costs ever upwards. Another inevitable result is the creation of rods for the backs of governments in the form of waiting lists: once a service is provided without any charge that is almost inevitable.
Once a free service is established it also becomes politically difficult to restrict access to it. However, if (for example) access to the age pension can be "rationed" by adopting a more restrictive means test and re-introducing an assets test (as the Hawke-Keating Government did), there is no logical reason why a similar approach should not be adopted for health services too. (It is relevant that charging for access to public health services would also have more effect on older age groups, who make greater use of such services but who are also significant beneficiaries overall of social security and associated services.)
Given that the abandonment of Medicare would not be politically acceptable, what now needs to be done is to introduce charges for the use of all three of the major services funded by the Commonwealth -- medical, hospital and pharmaceutical. (20) Such charges (or "co-payments" to use a more politically-correct term) would be payable by all those who are not in either low-income or chronically-ill groups and would be subject to an annual maximum. If people wished to take out insurance against such potential co-payment liabilities, they should be permitted to do so -- though it seems unlikely that many would, given that there would be only a small annual maximum.
Medical Services
Sensible Medicare reform was the first victim of Paul Keating's ascension to The Lodge. The co-payment introduced in 1991 by Deputy Prime Minister, Howe (in his then capacity as Minister for Health) for Medicare doctor visits would have been a useful start in reducing the escalating cost of public health care. Indeed, if consumers have to pay a recognisable cost as they use the service they begin to value it more and "ration" their use of it.
A co-payment levied at $5 per visit, subject to a $400 family safety net, could yield significant savings and reduce overservicing and waste within the health system. This charge should also be imposed on pensioners, who are the greatest users of the system. An offsetting rise in the pension, as was done when the $2.50 pharmaceutical charge was introduced a few years ago, would ensure that they are not financially worse off, but are made more conscious that there is a cost to regular doctor visits. The States should also be able to impose such a charge on their hospital out-patients.
The Keating reversal of the Howe co-payment proposal in January 1992 was estimated to cost $700m per annum within two years. As that proposal had a $3.50 charge and a $300 safety net, this one at $5 and $400 respectively should save over $1 billion.
Hospitals
Another major problem in the national health system is the public hospitals. There are two aspects to this -- the absence of any charge for the use of hospital services, leading inevitably to the development of waiting lists, and the comparative inefficiency of public hospitals' operations.
On the first, it would seem appropriate to require middle- and higher-income groups to contribute to the cost of their treatment in public hospitals. A simple proposal would be to require such groups to meet the cost of the first day's treatment, subject to a maximum of (say) $400. This is similar to the requirement imposed by many private health insurers. Pensioners and other low-income groups would be exempt. People could insure against the cost if they wished to do so.
Total public admissions to public hospitals are running at around 2.7 million per annum and the average cost per occupied bed-day was around $400 in 1991-92. If it is conservatively assumed that a bit over half (57 per cent) of public admissions to public hospitals would be exempt, a charge covering the first day's treatment could yield savings of $460m per annum.
The other aspect relates to the economic efficiency of public hospitals.
In Victoria, the Kennett Government has successfully introduced "case-mix" for public hospitals and has, at the same time, acted to reduce the overstaffing which had developed as a result of union capture of the public hospital system in the 1980s. The net result of these changes has been to allow the State Government to reduce its health expenditure by 11 percent over two years, while increasing the actual number of patients being treated in those hospitals and maintaining the quality of patient care. Waiting lists for urgent treatment have been eliminated. While Victoria started from a relatively bad situation, this suggests there is considerable scope for productivity improvements in public hospitals around Australia if the right funding signals are sent and if governments are prepared to bite the reform bullet.
This year the Commonwealth will contribute $4.6 billion in grants to the States towards public hospitals (excluding $700m for Veterans), an increase of 4.8 per cent on last year. These grants are indexed for award wage and CPI increases as well as age- and sex-weighted population growth. Given the scope for savings from improved productivity, there is a clear case for revising this formula so that the Commonwealth shares some of the productivity gains and encourages the nationwide development and further refinement of the case-mix funding system. A productivity discount of 2.5 per cent per annum in the grants formula would save about $115m per annum, increasing by that amount each year for a number of years. By 1996-97 savings would be about $230m.
Pharmaceutical
Further reform of the other major cost of health care, pharmaceuticals, is also needed. Subject to providing a safety net for those with chronic illness, there is no good reason why prescriptions to the general public should be subsidised. Abolition of the general subsidy would save $434m.
This would still leave the concessional payment category (which includes pensioners, the unemployed, low-income families, veterans, war widows and their dependants) at $2.60 per prescription until expenditures reach $135.20 per annum, then free. At $1.4 billion (and climbing at almost 10 per cent per annum), this is the major component of pharmaceutical costs. The Labor Government's earlier attempts to reform this area by introducing the $2.50 charge (now $2.60) has had a useful but essentially limited impact. An initial approach might be to make concession holders pay the full price like all others, but subject to the continuing safety net of $135.20 per year, indexed. This measure should be able to save at least 10 per cent or $140m.
Health Promotion Programmes
Many of these programmes are lifestyle programmes which seek to encourage better health, or safer sex or drug practices, but which focus excessively on specific issues when a broader, across-the-board approach may be desirable. They are often targeted to buy the votes of particular interest groups (and to keep factional differences within the Labor Party quiescent) and their usefulness is questionable. Analyses show no correlation between health expenditure and improvements in health. Those that do not provide medical or related services, but are just advertising campaigns, should be abolished. These include the National Health Advancement Program, Public Health Education, Women's Health Program (excluding cancer screening), and most of the grossly inflated HIV/AIDS-related funding. The combined savings from abolishing or heavily scaling down these programmes would be $60m.
| Summary | $m |
| Medical Services | 1,000 |
| Hospitals (Reduction in grants to States) | 690 |
| Pharmaceutical | 574 |
| Health Promotion | 60 |
| Total | 2,324 |
EDUCATION
Major Programmes
| 1982-83 | 1994-95 (est.) | |||
| $m | % GDP | $m | % GDP | |
| Higher Education | 1,669 | 0.96 | 4,227 | 0.93 |
| Vocational and Other Education | 259 | 0.15 | 751 | 0.16 |
| Schools | 1,398 | 0.81 | 3,125 | 0.69 |
| Student Assistance | 331 | 0.19 | 1,794 | 0.39 |
| Total (incl. other programmes) | 3,702 | 2.13 | 10,056 | 2.21 |
While the increase in Commonwealth expenditure on education has not been as large as the increases in health and social security, the justification for reductions in spending may be just as great. This is not to deny the potential for significant returns from increased investment in human capital or that government may have some role to play in supplementing such investment by individuals. However, as real incomes increase, the capacity of individuals to fund their own investment in education also increases. Particularly as there is, moreover, ample evidence available to show the potential benefits in terms of higher incomes from such investment, there is a strong case on both economic and equity grounds for the Government to play a progressively smaller role in funding higher education and in providing assistance to people seeking more advanced forms of education and who are capable of making such investment decisions for themselves.
More generally, it is difficult to justify the continued direct Commonwealth funding of higher education institutions, as opposed to providing assistance to those tertiary students who, though qualified, might otherwise (for financial reasons) be unable to avail themselves of higher education. The Government should thus move progressively towards direct student assistance and to limiting such assistance to financially-disadvantaged groups.
There is also no justification for the continued provision by the Commonwealth of large grants to the States for government schools. There are no potential externalities from such grants and they have little influence on the total level of expenditure in these areas, which is very largely determined by the various States. While there is a case for providing government assistance for attendance at non-government schools (this saves the taxpayer considerable amounts on pupils who would otherwise attend government schools), there is no case for intervention at the national level to achieve that.
Accordingly, the elimination of these grants and the handing back of the function to the States would reduce administration costs at both the Commonwealth and State levels, as well as improving Federal-State relations. The States would, of course, need to be compensated by an offsetting increase in their general revenue grants.
Bureaucracy Duplication
General administration of education costs the Commonwealth taxpayer $160m. If grants for schools were devolved back to the States and Territories, and direct funding of tertiary institutions (as distinct from financially-disadvantaged would-be entrants to such institutions) ceased, it should be possible to save $100m of such administrative costs.
Student Assistance
AUSTUDY provides income support to students undertaking approved courses in secondary schools, TAFE colleges and the like. Assistance is similar to the unemployment benefit and is subject to income and assets tests, parental and personal.
This is another area where a particular interest group has captured the system, with the result that student beneficiary numbers have increased from about 300,000 in 1987 to over 500,000 today. It is apparent that, by one means or another, considerable numbers of students from middle- and upper-income families (including wealthy overseas families) have been able to obtain assistance. (A recent academic study reportedly found that 36 per cent of private school students 16 years and over, and no less than 51 per cent of students from Hong Kong and 46 per cent from Malaysia, received AUSTUDY). The Government's recent decision gradually to lower the age of "dependence" for Austudy from 25 to 22 will only add to the problem. This decision, which was little more than an attempt to buy the support of the National Union of Students, will cost $40m within 4 years.
This proposal should be reversed and greater emphasis should be placed on assessing "independence" which is already widely and quite openly abused. The number of students eligible for AUSTUDY should be capped at 400,000 and the eligibility requirements toughened accordingly. A reduction in beneficiary numbers of 100,000 would yield total savings (combined) of at least $300m (including the $40m).
Post-Secondary
A freeing up of higher education, by transferring it to the States and providing assistance to individual students rather than institutions, would require universities to meet their costs from fees for students (as they currently do in the case of foreign students) and would allow them to vary the costs of courses -- including top-up fees. Universities could also more actively involve business and benevolent funds. Similar arrangements should be made for TAFE. This approach would be consistent with the world-wide trend of concentrating the government's role on the funding rather than the delivery of services.
Such a major change would take time to implement. The opportunity should be taken progressively to reduce (in effect) the number of students who are assisted by government by limiting such assistance to low-income and disadvantaged groups. In the short term, it should be possible to keep funding to current levels, saving (against forward estimates) $300m per annum in higher education and $200m per annum in Vocational and other Education (TAFE).
| Summary | $m |
| Bureaucracy | 100 |
| Student Assistance | 300 |
| Post-Secondary | 500 |
| Total | 900 |
HOUSING AND COMMUNITY AMENITIES
Major Programmes
| 1982-83 | 1994-95 (est.) | |||
| $m | % GDP | $m | % GDP | |
| Assistance to Other Governments | 443 | 0.26 | 927 | 0.20 |
| Total (incl. other programmes) | 775 | 0.45 | 1,197 | 0.26 |
Housing assistance to low-income groups, and to groups judged to be disadvantaged in finding suitable accommodation, is provided through the Commonwealth-State Housing Agreement. A number of different programmes of housing assistance are provided by the Commonwealth under this Agreement. These include untied grants for the construction and maintenance by State Governments of a public rental-housing stock, presently consisting of about 370,000 dwelling units valued at about $20 billion. There is also a range of programmes covering rental assistance (including in the private rental market), or assistance with the purchase of housing, to low income groups. Some programmes of assistance for low-income renters/buyers are included under Social Security and Welfare, not Housing. (The vast majority of people in public housing are, in any event, also in receipt of welfare assistance.)
There is a major question as to whether the Commonwealth (or indeed any other government) should continue to provide assistance for the construction of public housing. The Industry Commission's 1993 Report on Public Housing did conclude that the construction and maintenance of public rental housing "can be cost effective" if housing administration is efficient. This conclusion appeared to be based, at least in part, on the Commission's assessment that the private rental market is imperfect in providing adequate housing for some low-income groups. At the same time, the Commission acknowledged that that market would be improved by reducing government intervention and that some of those who need housing do not wish to resort to public housing. It also made criticisms of the administration of housing assistance.
Assessments of the capacity of the private market to adapt should not be based on the present inadequacies and should take account of the "unfair" competition which exists from the presently large public housing sector. The agreement by NSW with superannuation funds to finance low-cost housing shows that there is considerable potential for the private sector market to develop given that governments accept a much reduced role.
If Commonwealth funds were diverted from public housing construction and property acquisitions, support could instead be provided in the form of rent or mortgage relief. Such an arrangement would in theory provide support for around 25-30 times as many families per dollar as capital funding. Alternatively, it would provide scope for significant savings. The Industry Commission proposed that the Commonwealth confine its role to the provision of rent assistance to households on low incomes and it would seem sensible to adopt that proposal. In that event the continued provision of public rental housing would be a matter for each individual State to decide. (21)
If the Commonwealth funded only rental or mortgage assistance through social security and the States had sole responsibility for public housing, such a change would also avoid unnecessary duplication between the Commonwealth and the States in the housing area as well as more logically fitting in with the Commonwealth's social welfare responsibilities. This approach would involve transferring half the Commonwealth's current contribution to the social security area and saving the other half of $500m. The Department of Housing and Regional Development could be closed down, with any residual responsibilities transferred to other Departments.
Other
With the transfer of housing responsibilities to the States a number of smaller programmes could also be terminated. The National Urban Development Program, the National Housing Strategy and costs associated with the Better Cities Program and the Local Government Development Program (two projects largely designed to keep Deputy Prime Minister Brian Howe happy) could be abolished, while bureaucratic duplication could also be eliminated. Savings: $22m.
| Summary | $m |
| CSHA | 500 |
| Other | 22 |
| Total | 522 |
DEFENCE
Major Programmes
| 1982-83 | 1994-95 (est.) | |||
| $m | % GDP | $m | % GDP | |
| Personnel and Retirement Benefits Costs | 2,083 | 1.16 | 3,689 | 0.81 |
| Defence Equipment and Stores | 1,493 | 0.86 | 3,676 | 0.81 |
| Defence Facilities | 114 | 0.07 | 549 | 0.12 |
| Total (incl. other programmes) | 4,500 | 2.59 | 9,637 | 2.12 |
There has been much debate about the defence needs of nations in the post-Cold War world. Australia has never had a very large or expensive defence force and the Government has continually reduced the proportion of GDP allocated to defence. While improved technology has provided considerable scope for increased productivity, there is concern that, at around 2 per cent of GDP, the bare minimum rock bottom has now been reached if Australia is to have a credible force. However, this does not mean that savings may not be achievable through changes in administrative arrangements and greater resort to commercialisation of some activities.
Commercialisation
The Wrigley Report of 1991 identified savings of up to $350m per annum from greater commercialisation of the forces. While the Government accepted many of the Report's recommendations, the speed of their implementation has been very slow. The extent of commercialisation could also be expanded to all non-high security areas. If this process was hastened and broadened it could contribute savings of $250m per annum.
Diarchy
The biggest burden to the Defence Budget is the cost of running two administrations -- the "diarchy". This results from the development of an armed forces central headquarters and a Departmental one. This sees virtually all functions being duplicated, a great many committees to resolve differences and a lot of double-guessing (this doesn't even include the triplicate nature of the three arms of the forces themselves which each have their own administration and support). This structure does not improve a Defence force which needs to have, as its foremost traits, flexibility and speed. There are 15,000 combat personnel, compared to 50,000 service personnel in support roles and half that again in civilians. It is time to address this burdensome bureaucracy and dismantle the diarchy. Such a move could save $350m, although redundancies would have to be absorbed in earlier years. Properly implemented, this would leave Australia with a more efficient and effective armed forces capability.
| Summary | $m |
| Commercialisation | 250 |
| Diarchy | 350 |
| Total | 600 |
CULTURE AND RECREATION
Major Programmes
| 1982-83 | 1994-95 (est.) | |||
| $m | % GDP | $m | % GDP | |
| Broadcasting | 354 | 0.20 | 763 | 0.17 |
| Arts & Cultural Heritage | 148 | 0.09 | 349 | 0.08 |
| Sport and Recreation | 24 | - | 114 | 0.03 |
| National Estate and Parks | 15 | - | 125 | 0.03 |
| Total | 542 | 0.31 | 1,351 | 0.30 |
The rationale for government assistance to the arts is that there are benefits from having a greater proportion of resources devoted to cultural pursuits than would be the case if these pursuits were left to "the market". It is argued, in particular, that "the market" would not by itself produce artistic excellence and that such excellence contributes importantly to "the quality of life" and is a matter of national (or State) prestige.
However, while there is some validity to such arguments, they have to be balanced against the increasing difficulty of justifying continued high levels of funding in circumstances where "the arts" is now a well-established and growing industry in Australia and where its services are increasingly being used by Australian businesses and well-to-do individuals, not to mention foreign tourists for whom visits to galleries, museums, and the like, have become an essential (but heavily taxpayer-subsidised) occasion. Indeed, while they have been assisted by government subsidies, all branches of the arts industry have demonstrated that they are now well able to compete in the international market place, including some with little or no subsidy. Many Australians now make good livings from the industry and, while there are also many who strive to become artists but do not succeed, that should not be a matter for the taxpayer any more than it should be in the case of would-be champion athletes.
As living standards rise, the arts should look increasingly to the market and private patronage, and taxpayers could reasonably be expected to be relieved of most of the burden of support. Particularly as the "users" of the arts come to a large extent from middle- and upper-income groups, and as many such users get spin-offs of more than one sort from their involvement in and enjoyment of the industry's services, it seems reasonable to look to such users to fund a much higher proportion of "artistic excellence".
There is a further reason for reducing government assistance to the arts, viz., the increasing tendency of governments to (mis-)use patronage of the arts as a vehicle for conveying the impression of national (or State) leadership and, thereby, canvassing political support for the party in power. In short, in yet another example of vote-buying from particular interest groups, the arts have become politicised. The present Prime Minister's use of this tactic is particularly blatant and the taxpayer should not have to pay for it.
Accordingly, there should now be a large reduction in Commonwealth "cultural" assistance and the achievement of artistic excellence should be left largely to the private sector.
Broadcasting
The Australian Broadcasting Corporation (ABC) receives over $600m of taxpayers' funds ($530m directly from the Budget plus $70m in free transmission services from the Department of Communications). To put this into perspective, the annual taxpayer funding to the ABC is equivalent to the total annual Commonwealth commitment to Technical and Further Education, or more than double the annual Commonwealth funding for Vocational Training.
With a nationwide audience of only about 13 per cent, and even a country audience (where the commercial programmes are often less readily available) of less than 30 per cent, it is difficult to justify such a high level of funding for public broadcasting, particularly as the "users" of these services tend to be in middle- and upper-income groups. Commercial broadcasting and television have been and are expanding at a rapid rate, both in Australia and internationally, and are delivering a wider range of programmes. There will be a further expansion in the already wide range of TV programmes when Pay-TV arrives and the CD ROM is already contributing both in terms of quality and quantity.
There is a question as to whether, if the ABC was privatised, the commercial sector could not now take over the ABC's role -- apart, that is, from providing an outlet for the ABC's New Class denizens to spout their prejudices free from accountability. If it appeared that particular programmes or areas of "high culture" would be neglected without the ABC, subsidies could be offered for the provision of such programmes and commercial (including ex-ABC) interests invited to tender for them on a competitive basis.
Accordingly, options for the sale of the ABC and its operating units should be developed with a view to privatisation in 1996-97. Provision should be made for continued subsidies to cover broadcasting to remote areas and for programmes of "high culture". This approach would save around $500m per annum and would also provide much needed assets sale revenue to reduce accumulated budget debt. In the meantime, the ABC should be forced to get itself into better financial shape by cut-backs on senior management (which has almost doubled in three years), and on world travel, and by reducing services which are clearly duplicated by commercial interests. The major television and radio networks went through major restructuring with cuts often up to 30 per cent, while the ABC has hardly been touched.
The SBS has proven a successful and efficient television and radio network, especially when compared to the ABC. Nonetheless, somewhat similar tendencies to those which have, over the past 25 years or so, resulted in the "capture" of the ABC, are now beginning to appear in the SBS. In any case the same rationale as discussed above dictates that the Government should have no ongoing role in owning this form of asset. The private radio sector already caters for ethnic groups and would doubtless expand further if the SBS were sold. As a lean, still relatively highly-regarded broadcasting company, its sale would no doubt attract considerable private sector interest.
The special charter of the SBS to supply services to non-English speaking background Australians could continue as a condition of sale of its broadcasting licence, or be the subject of separate arrangements with commercial interests who were prepared to tender for the supply of such services. While making the supply of such services a condition of licence could result in a slightly lower price for the network's sale, it would not deter willing and keen buyers. The sale would result in direct savings of SBS's annual appropriation of $77.5m, plus the $5.5m of free transmission services which it receives. Total saving $83m.
National Collections
These include the Commonwealth national galleries, museums, libraries and the Australian War Memorial. The collections of these national bodies are well-established and well-regarded, and the need for capital funding to supplement them is now limited. Attendances at these institutions have increased strongly in recent years. Even so, the total cost to the taxpayer of all these bodies is still running at $128m per annum. This will be added to by the Prime Minister's promise of a new Gallery of Aboriginal Australia, the cost of which has not yet been revealed.
Such bodies should now be expected to adopt the corporate objective of covering their costs -- not necessarily immediately, but on the basis of clearly defined corporate plans designed to achieve that objective over not more than (say), five years. With some exceptions, they should be able to raise capital costs from public bequests, donations or corporate sponsorships. Operating costs should largely be met by user charges (with appropriate exemptions or reduced charges for students and low-income groups) with the rest coming from donations and sponsorship of exhibitions. These changes could be phased in over 5 years.
Film Industry
The Australian film industry is another branch of the arts that has become well established and is thriving. Australian film makers are now more than capable of producing saleable films, both for domestic and international viewing. At a time when industry generally is having its assistance reduced even in the face of fierce international competition, there is no case for the recent increase in government paternalism towards the film industry. Yet the Prime Minister's Cultural statement committed the taxpayer to an additional $155m (over four years) for film, television, radio and multi-media. The abolition of taxpayer-funded film finance would save $79m in 1995-96.
Arts and Heritage
The dominant item of funding within this area is the Australia Council. Despite the Government's own reservations about the appropriateness and effectiveness of this body, it was given additional responsibilities and resources in the Cultural statement. Even one or two brave members of the artistic community have criticised the Council for its (in their view) unjustified patronage and personal prejudices. This indicates that, as with film, the personal predilections of those who appreciate and are interested users of the services of the creative world are best met primarily by private support.
In accordance with the general approach outlined above, the activities of the Australia Council should be phased out over 5 years. This would save $65m, with an estimated saving of $26m by 1996-97. Similarly, the financial support of the Opera, Ballet and Orchestras should be made a matter for their patrons within 5 years. This would save an extra $20m, with a saving of $8m by 1996-97.
Sport and Recreation
This item includes the Australian Sports Commission (which through the Australian Institute of Sport trains allegedly "elite" athletes), an Athlete Preparation Strategy for the Sydney 2000 Olympics, and support for the Sydney Olympics. Even though the Los Angeles Olympics was privately funded, assistance for the Olympics may be justified as providing one-off "external" benefits.
The Institute of Sport and Sports Drug Agency should, however, be made independent and financially self-sufficient by way of private contributions from athletes, sponsors and donors. The department's sports advisory function should also be terminated. There is no need for Australia to have one Federal Sports Minister and six State Ministers; their main activity is vote-buying, as was well demonstrated by the whiteboard activity of the former Federal Sports Minister. The Commonwealth should vacate this arena. Combined savings from rationalisation (excluding Olympics programmes): $40m.
Environment
Commonwealth spending on environmental matters has grown under the "Culture and Recreation" heading from $110m in 1991-92 to a budgeted $180m this year. However, an additional $112m is provided in 1994-95 for "Environment Protection" under the Housing function, up from $41m in 1991-92. Thus, total Commonwealth spending on environmental matters has increased from $151m in 1991-92 to no less than $293m (est.) in 1994-95. (However, $30m of 1994-95 expenditure on environment protection reflects expenditure on the rehabilitation of the Maralinga former atomic test site, and the forward estimates project a reduction in such expenditure to $55m in 1996-97).
The Commonwealth's heavy involvement in environmental matters is, to a large extent, another case of responding to narrow, sectional interest groups who create the impression of being able to deliver votes. The result has been to reduce investment and employment below what they would otherwise have been with little or no benefit to the environment properly defined.
The creation of a National Environment Protection Authority was a case of duplication with the States (which already have similar bodies), at its worst. It is completely unnecessary and should be abolished before it gets too "established".
The Commonwealth will spend $61m on "environment strategies" this year. These programmes also all involve duplication and interference in State affairs, and conservation management issues. The Commonwealth should significantly reduce this overlap. Savings are estimated as at least $30m.
| Summary | $m |
| Broadcasting | 583 (a) |
| National Collections | 128 |
| Film | 79 |
| Arts | 34 |
| Sport | 40 |
| Environment | 50 |
| Total | 894 |
(a) Excluding proceeds from assets sales.
TRANSPORT AND COMMUNICATIONS
Major Programmes
| 1982-83 | 1994-95 (est.) | |||
| $m | % GDP | $m | % GDP | |
| Air Transport | 521 | 0.30 | 102 | 0.02 |
| Land Transport | 1,008 | 0.58 | 1,080 | 0.24 |
| Sea Transport | 135 | 0.08 | 140 | 0.03 |
| Total (incl. other programmes) | 1,815 | 1.05 | 1,349 | 0.30 |
Specific purpose payments to the States for the construction and maintenance of roads constitute the main programme. From 1 January, 1994 the Commonwealth untied $350m a year for funding of State arterial roads and for 1994-95 that amount has, in effect, been transferred from this function to "Assistance to Other Governments, NEC", where it is included as general revenue assistance.
Australian National Railways
Included under "Land Transport" is a provision in 1994-95 of $222m for rail transport, including $71.7m for the Australian National Railways Commission, of which $53m is to cover continuing losses on passenger operations as well as redundancies. The ANR's interstate freight operations have been transferred to the newly-established National Rail Corporation but it retains a rump responsibility for intrastate rail freight in South Australia and Tasmania.
It is clearly anomalous for the Commonwealth still to have a separate railway (freight) operation in two States and to operate only an interstate passenger service. The continued operation of the latter with such high losses is particularly difficult to justify given the ready availability of interstate bus and plane travel. Accordingly, the operations in the two States should be offered back to their Governments and the interstate passenger service should be closed unless a private operator is prepared to take it on franchise. Assuming that the sale of the two States' operations would produce no return (but would cease to incur a loss), the total saving by 1996-97 would be $23m (the amount provided in the forward estimates for that year).
Tasmanian Subsidies
Under the Tasmanian Freight Equalisation Scheme an ongoing subsidy is provided to shippers of certain goods between Tasmania and the mainland, estimated to cost $39.5m in 1994-95. A separate freight subsidy on the transport of wheat to Tasmania is also provided, estimated at $2.7m in 1994-95, as well as a $300,000 subsidy on the Bass Strait Passenger Service.
Tasmanians argue that Bass Strait should be treated as if it were a road and they claim, on that basis, that the Commonwealth should contribute to the cost of the Bass Strait "road", just as it contributes to the cost of other "national" highways. However, Tasmania already receives a relatively generous per capita share of Commonwealth road grants ($55 per head compared to the six-State average of $46 per head) and there can be no more justification for the residents of other States subsidising the Bass Strait crossing than there would be for them to subsidise the cost of transport between the Eastern States and Western Australia. In reality, these subsidies have been provided and maintained by successive Commonwealth Governments entirely for political reasons.
Accordingly, these various subsidies should be abolished, saving an estimated $43.5m in 1995-96.
Australian National Line
According to the 1994-95 Budget papers, the "Government's decision to sell a substantial part of ANL was first announced in the 1991-92 Budget". The fact that no final decision has yet been made about the sale of this shipping business is symbolic of the Government's incapacity to resist trade union pressure designed to block microeconomic reform. The sale should proceed forthwith, regardless of the outcome of the Wran "inquiry". It must now be doubtful if the sale would yield any significant sum but it would at least save the loss of around $23m last financial year.
| Summary | $m |
| Australian National Railways | 23 |
| Tasmanian Transport Subsidies | 44 |
| ANL | (23) (a) |
| Total | 67 (a) |
(a) This loss does not show up in the Commonwealth budget, but is in effect funded off-budget by increasing borrowings.
LABOUR AND EMPLOYMENT
Major Programmes
| 1982-83 | 1994-95 (est.) | |||
| $m | % GDP | $m | % GDP | |
| Vocational and Industry Training | 108 | 0.06 | 363 | 0.08 |
| Labour Market Assistance to Jobseekers and Industry | 288 | 0.17 | 1,764 | 0.39 |
| industrial Relations | 82 | - | 264 | 0.06 |
| Employment Services | 171 | 0.10 | 858 | 0.19 |
| Total (incl. other programmes) | 705 | 0.41 | 3,521 | 0.78 |
Outlays on Labour and Employment are mainly for training and employment assistance, facilitation of migration and temporary entry into Australia, and the operation of associated Commonwealth agencies. These outlays include: subsidies to employers for apprentices, trainees and disadvantaged jobseekers; payments to suppliers of formal training; income support for people undertaking full-time training; and assistance for people affected by industry restructuring. Outlays also include the operational costs of the Federal industrial relations system and the relevant parts of the Departments of Industrial Relations (DIR), Immigration and Ethnic Affairs (DIEA) and DEET, including the CES.
Of the major functions, this is the one where expenditure has increased most -- by about 5 times -- since 1982-83, with the biggest increase being in labour market assistance to jobseekers. It is important to keep in mind that these outlays are additional to the $7.6 billion being provided to the unemployed and sick under Social Welfare: that is, in 1994-95 the taxpayer is spending over $11 billion in "relieving" unemployment in one form or another, or about $13,000 per person unemployed.
The Newstart Allowance (which accounts for $3.8 billion of such spending in 1994-95) is provided under a so-called "structured activity arrangement". In essence, the NSA arrangements for long-term unemployed are similar to the new labour market assistance arrangements and, as such, the latter are something of an admission of the failure of the NSA. It is certainly pertinent to ask the question -- given that the NSA has apparently had a minimal effect in reducing long term unemployment, why would the latest arrangements (the so-called Working Nation arrangements) do any better? (22)
Certainly, there is no sign to date that the large expenditure on labour market programmes over recent years has had any effect in reducing the "natural" unemployment rate. Indeed, it is now widely accepted that, despite all the emphasis (and money) devoted to labour market programmes during the past decade, the NAIRU (the non-accelerating inflation rate of unemployment) has risen since the early 1980s and is now around 7-7.5 per cent. As pointed out by the Director of the National Institute of Labour Studies Professor Judith Sloan in an article in the Australian Financial Review (17 November, 1994), it is indeed quite possible that such programmes increase the NAIRU -- by making it "easier" for unions to press for larger wage increases and/or because the cost of job losses to individual workers is reduced. The unemployment experience of countries (such as Sweden) with large labour market programmes is certainly not encouraging in this regard.
Commonwealth Labour Market Assistance and Unemployment
The Government's basic argument is that, by giving the unemployed (particularly the long-term unemployed) training and other assistance now, they will be absorbed into the workforce as the economy recovers and the NAIRU will consequently be lowered. A further line of argument is that it is a matter of "equity and justice" that the unemployed be given the opportunity to become employed (or re-employed).
A major difficulty with this approach is that it almost certainly does not deal with the major underlying cause of Australia's high unemployment, viz., the high cost to employers, relative to the likely returns in terms of taking on extra employees, particularly those who are amongst the lesser-skilled. This relatively high cost arises to an important extent because of the institutional and regulatory structure within which employers and employees have to operate, including the quasi-monopoly status accorded to trade unions which raises the price of labour and, as a result, inhibits the employment of those who are less skilled. "Equity and justice" would be better met by addressing this problem.
Nor does the labour market programme approach do anything to reduce the disposition of the unemployed to remain on social welfare. This problem has been mentioned above under Social Welfare. However, it is worth adding that the expansion in labour market programmes may either be attracting people into the labour force or keeping them there longer than would otherwise be the case. The continued high participation rate (that is, the continued high proportion of the working-age population actively seeking work) during the 1990s may partly reflect this influence. To the extent that such influence does exist, the net result may be to keep the unemployment rate higher than it otherwise would be. It is relevant that the vast raft of schemes, programmes, and initiatives is scheduled to fund a total of no less than 585,000 places in 1994-95, equal to around 70 per cent of those on unemployment benefits.
Thus, the Government has got itself into a bind: in responding to pressure from union and other activist groups to "do something" about the very high levels of unemployment which were maintained until about a year ago, it entered into expensive labour market programmes only to find that, even before these really got under way, the unemployment rate started to drop as a result of cyclical influences and is now 1.7 percentage points lower than last November.
Thus the forward estimates provide for a further massive increase in such programmes of 33.7 per cent in 1995-96, following the 25.8 per cent increase this year. The Minister will doubtless argue that the benefits of such expenditure will come when unemployment approaches the 7-7.5 per cent rate at which NAIRU is said to be.
However, the Government should not allow the programmes to continue on the basis of flimsy hopes and in the face of analytical evidence which suggests their futility. While it would clearly involve too much loss of political face to now abandon these labour market assistance programmes altogether, the way out may be to combine them with the Newstart Allowance programme and, in the process, to use the fall in unemployment as an "excuse" for scaling down heavily the provision for the combined programmes. The obvious need for rationalisation of the 14 different types of labour market assistance programmes could provide a further justification for effecting such a scaling down. (At the very least, "Jobstart", "Jobtrain", "Jobskills" and "Jobclubs" should be combinable -- perhaps into one "Jobclub"!). The reports suggesting that employers are showing only marginal interest in those programmes carrying incentives to take on employees -- doubtless for the reasons mentioned above -- could be used as another reason for a new start.
One particular programme of limited value is the Jobstart programme which basically provides a subsidy to an employer because the cost of the employee's labour is too high. This situation has arisen because of the lack of flexibility in labour relations. It is an absurdity for other workers who are being paid what they are worth to have to pay taxes so a privileged group of fellow workers can be paid the same wages even though by definition the employer (and the Government) considers them to be worth less. The fact that this is one of the better-performing programmes indicates that, when wage costs to employers can be reduced, they are prepared to take on extra staff. Thus, having eventually accepted the need for enterprise-based employment relations, the Government should now take the next step and address this obvious inflexibility in the award system. That would make wage subsidies unnecessary for the almost 200,000 programme participants. Total savings: $467m after full phase-out.
Rationalisation of the remaining labour market programmes, in the context of increased labour market flexibility, should save an additional $500m.
Industrial Relations
With the shift to an enterprise-based industrial relations system, there should no longer be any need for a large corporatist industrial relations department and related activities. Yet industrial relations is still expected to consume $260m annually for the next few years. With the exception of the cost of the Industrial Relations Commission and Special Industry Services -- which are fully funded by levies -- the rest of the expenditure could be abolished. Employers and (particularly) unions could reasonably be expected to use private sector advisory and conciliatory services.
This would also result in an end to "workplace reform" payments, which are another form of subsidy to trade unions (over the last 11 years of Labor Government, grants of various sorts to trade unions have exceeded $80m); the closure or sale of the Trade Union Training Authority (annual cost $10m); a major reduction in advisory services; and abolition of the Affirmative Action Agency and the Construction Industry Development Agency. Total savings: $100m.
The National Occupational Health and Safety Commission should have its responsibilities handed back to the States' respective bodies, saving an extra $20m.
Employment Services
The Commonwealth Employment Service (CES) is one of the larger and more expensive government agencies. It is estimated to cost $858m this year, a 15 per cent real increase over the previous year. Its size increased dramatically following the recession, the new responsibility for Newstart (the long-term unemployment benefit) and, more recently, the case-management "system" adopted under Working Nation.
The CES is not viewed very positively either by employers or by clients and the decision to move Newstart to the CES from DSS a couple of years ago was a mistake. DSS is relatively efficient at processing and dealing with welfare issues; by comparison the CES is not. The CES and DSS should be merged into one larger body which can administer welfare payments and related activities. The CES's job-placement function should be contracted out to private-sector employment agencies by putting them out to tender with a success fee. Such a proposal has been given consideration before and also been supported by DSS, who have claimed that major savings can be made. It has naturally been resisted by DEET (the department responsible for the CES). Savings arising would be at least $300m.
| Summary | $m |
| Labour Market Programmes | 967 |
| Industrial Relations | 120 |
| Employment Services | 300 |
| Total | 1387 |
PRIME MINISTER *
Under Mr Keating the Department has further developed the cornucopia of special interests bodies and Prime Ministerial pet projects (past and present). This is reflected in the inclusion of the allocation for ATSIC under the Prime Minister's responsibilities, resulting in his Department's being responsible for outlays of $1,131m in 1994-95, up 10.0 per cent on last year.
ATSIC aside, there is a need for a good cleanout, which could begin with the abolition of a number of quangos. The Office of the Status of Women ($6m), the Office of Multicultural Affairs ($5m), Council for Reconciliation ($10m), the Office of Economic Planning Advisory Commission ($2m), and the Australian Science and Technology Council ($2m) should all be axed and, to the extent that some of their functions are still needed, they should be returned to the Departments where the relevant responsibility lies, for example, EPAC functions should be performed by Treasury. Combined saving: $25m.
| Summary | $m |
| Total | 25 |
* Expenditure by the Prime Minister's Department is not a "function" but is scattered across a range of functions. It is included here as one indicator of the extent to which taxpayers' funds are being used for predominantly political purposes.
ABORIGINAL AND TORRES STRAIT ISLANDER AFFAIRS
Aboriginal Programmes
| 1994-95 $m | |
| Aboriginal Advancement Programmes ATSIC and TSRA (1) CDEP (2) National Aboriginal Health Strategy Total (incl. other programmes) | 563 281 113 1,032 |
| ABSTUDY etc | 158 |
| Aboriginal Rental Housing | 104 |
| Aboriginal Employment Assistance | 45 |
| Total | 1,339 |
(1) "Global" allocations to Aboriginal and Torres Strait Islander Commission and Torres Strait Regional Authority.
(2) Community Development Employment Projects. Some unemployment benefits are channelled into these "vork for the dole" type projects.
This is not a separate function. Expenditure on aboriginal programmes is spread across a number of functions -- Social Security and Welfare (Aboriginal Advancement Programs), Education (ABSTUDY and Other Assistance to Aboriginals), Housing and Community Amenities (Aboriginal Rental Housing) and Labour and Employment (Aboriginal Employment Assistance). An attempt is made here to bring the various budget allocations together to show their total extent. Assuming an Aboriginal and Torres Strait Islander population of about 290,000, the total amount identified below is equal to about $4,600 per head. This excludes some, though not all, unemployment benefits and also excludes expenditure under other programmes available to both Aborigines and non-Aborigines alike.
The Government's strategy for assisting Aborigines implies a rejection of any "assimilationist" approach and an acceptance of a collectivist approach that encourages separatist development in which "people are encouraged to see themselves as members of groups with a collective entitlement to resources obtainable in political competition with members of other groups". (23) This strategy is fundamentally flawed and against the interests of Aborigines themselves, who are not one single homogeneous group and who should, in general, be assisted under the same programmes and on the same basis as other Australians who are in need of special help.
ATSIC
The Aboriginal and Torres Strait Islander Commission (ATSIC) is the main Aboriginal programmes funding body. It replaced the Department of Aboriginal Affairs and subsumed most of its functions. Its budget has increased from $600m in 1990-91 to over $1 billion in 1994-95. Much of its expenditure has been broadly criticised as wasteful, misdirected or simply ineffective. An administration which takes over 10 per cent of the resources does not assist.
There is now enough experience with ATSIC to confirm not only that it lacks support from the Aboriginal community itself (this is reflected in the fact that only about one in three turn out at ATSIC elections), but that it is an inappropriate and divisive vehicle to administer assistance for Aborigines. Its activities should therefore be wound back into the relevant departments. Failing that, ATSIC funding should be held at the 1993-94 year level, which alone would mean a saving of $100m this year against the forward estimates. Stricter accountability and performance auditing should be implemented to try to reduce the over-funding involved in the three-tiered administration and the excessive personal well-being of commissioners and employees.
Land Fund
ATSIC's role looks set to be increased as the Government transfers responsibility for the Land Fund to it following the Senate's insistence on significant amendments to the Land Fund legislation and the Government's refusal to accept such amendments. The Fund was to get an initial allocation of $200m this year, to be built up to $1 billion.
There has been much debate about the appropriateness of the Land Fund as a suitable means for addressing Aboriginal advancement. It does not address the main problems faced by Aborigines, and is responding to the symbolic importance which Aborigines attach to land rather than to the substance. Indeed, by encouraging people to go to places where there are no or only limited employment prospects, the end result may be to worsen the position and prospects of sections of the Aboriginal community. The main beneficiaries are likely to be the professional Aboriginal activists who will no doubt gain control of, or significant influence over, it. It should be scrapped as a misdirected idea. Although the saving over time would amount to the $1 billion planned contribution, the saving this year would only be worth $25m, which (due to accounting arrangements) is the only estimated outgoing (purchase) from the fund and hence the public sector.
Abstudy
Abstudy is the Aboriginal version of Austudy. As such, it is discriminatory in that it denies non-Aborigines access to its benefits. It is also a more generous scheme so far as eligibility goes, that is, it is easier to qualify -- there is no assets test (or objective test of Aboriginality), for instance, and it is financially more generous, by providing additional assistance for school fees. Aboriginal Australian students should be eligible for the same assistance as other Australian students. Abstudy should be merged into Austudy, with Austudy guidelines being applicable. Such a move would save in the order of $30m.
| Summary | $m |
| ATSIC | 100 |
| Abstudy | 30 |
| Land Fund | 25 |
| Total | 155 |
LAW, ORDER AND PUBLIC SAFETY
Main Programmes
| 1982-83 | 1994-95 (est.) | |||
| $m | % GDP | $m | % GDP | |
| Courts and Legal Services | 125 | 0.07 | 407 | 0.09 |
| Security and Intelligence Services | 46 | - | 117 | 0.02 |
| Criminal Investigation | 100 | 0.06 | 250 | 0.06 |
| Other Law, Order and Public Safety | 85 | 0.04 | 107 | 0.02 |
| Total | 355 | 0.20 | 881 | 0.20 |
The Commonwealth has developed a number of legal or quasi-legal "institutions" which seek to intrude an overriding national role into various aspects of human rights and crime. As in a number of other areas, this Commonwealth intrusion is largely a response to interest groups with either narrow perspectives or a belief that additional policing and/or regulation will solve problems or improve human relations. Experience with these authorities, however, suggests that they contribute little of value and are not infrequently counterproductive.
In particular, the HREOC and the Law Reform Commission do not add anything to the Australian legal system -- if anything they tend to undermine the precedents which are important to maintaining a stable society. The National Crime Authority was set up to catch bigwig criminals who fell through the net. It duplicates functions of the Australian Federal Police, Australian Securities Commission and State bodies. It proved to be very unsuccessful in the 1980s and its demise would not be noticed, let alone regretted. The Institute of Criminology performs work done by police forces, the Australian Bureau of Statistics and universities. Any residual function it has could be adequately handled by those bodies. The ATRAC has already undergone a name change but what was really needed was extermination. This body is a very costly and burdensome imposition on banks, customs authorities and individuals undertaking normal ordinary business. It has, like some of these other bodies, failed to live up to its supposed role -- identifying crooks.
Accordingly, the Law Reform Commission, Human Rights and Equal Opportunity Commission (HREOC), Australian Institute of Criminology, National Crime Authority, the Australian Transaction Reports and Analysis Centre (ATRAC, formerly the Cash Transactions Reports Agency) should all be abolished and the matters dealt with by them left to the States or other Federal authorities.
The combined savings from these abolitions is $78m.
Legal Aid
With the increasing deregulation of the legal profession it should now be possible for that profession to take on an increasing number of cases on the basis of "no win, no fee". This should allow a progressive reduction in the provision for legal aid, which is estimated to be $145m in 1994-95 or 5.0 per cent higher than last year. A saving of $10m should be achievable in 1995-96.
| Summary | $m |
| Abolish HREOC, AIC, NCA, ATRAC | 78 |
| Reduce Legal Aid | 10 |
| Total | 88 |
FOREIGN AFFAIRS AND OVERSEAS AID
Major Programmes
| 1982-83 | 1994-95 (est.) | |||
| $m | % GDP | $m | % GDP | |
| Overseas Aid Bilateral Multilateral Administration Sub Total | 642 155 15 812 | 0.37 0.09 - 0.46 | 1,041 356 55 1,453 | 0.23 0.08 - 0.31 |
| Foreign Affairs Non-Aid | 240 | 0.14 | 759 | 0.17 |
| Total | 1,052 | 0.61 | 2,212 | 0.49 |
The combining of the foreign affairs and overseas trade functions might have been thought likely to force the Department and its Minister to pay a little less attention to accommodating the desires of overseas countries in the interests of having "friendly relations" and somewhat more attention to Australia's national economic interests. In fact, the Department still gives far too much support to policies because they are seen as "politically correct" in international forums, because they are in accord with pressures from narrow interest groups in Australia or because they provide Australia (and the Minister personally) with the opportunity to give the appearance of international leadership. As part of this syndrome, it is still far too ready to take the internationalist approach without paying adequate regard to where Australia's interests lie. Australia would benefit from the Department and its Minister adopting a somewhat lower profile and recognising that the best contribution Australia can make in assisting the world's developing nations is by allowing them freedom to trade with us and by encouraging them to pursue domestic economic policies which minimise the role of government.
With the development of international capital markets that have an enhanced capacity to assess risk, there should also now be a lesser role for foreign aid to play, whether provided bilaterally or through multilateral institutions. Indeed, it would likely improve the policy stances and outcomes of most developing countries if they reduced their reliance on foreign aid and exposed themselves more to the "discipline" of international capital markets. This is particularly relevant to Papua New Guinea, the country which is the largest recipient of Australia's bilateral aid and which has evidently allowed the continued receipt of such aid (in general-purpose form) to delay much-needed reform to an oversized public sector.
Accordingly, there should be a significant reduction in the $390m earmarked in 1995-96 for multilateral organisations (including the United Nations, the Commonwealth, the World Bank, the Asian Development Bank and the European Bank for Reconstruction and Development). A reduction of $59m or 15 per cent should be achievable.
An even larger reduction should be made in bilateral aid, which does not even enjoy the benefit of being administered by multilateral agencies but is largely the product of various "deals" entered into by our posts overseas with the governments of the countries concerned. Papua New Guinea receives the largest single donation at $213m and, although this is less than the $270m they received a few years ago, its policies would clearly be improved by a faster reduction in such aid. In addition, the Development Import Finance Facility (DIFF) should be dispensed with. This is, in reality, not aid but an inequitable form of industry assistance which is paid to a few very large Australian companies that do not (and should not) need taxpayer handouts to export their products and expertise. This would produce a saving of over $130m. Areas of emergency aid, refugee relief and NGOs (non-government organisations) should, however, be left untouched.
General Administration is a significant cost at $597m. A 10 per cent saving ($60m) in this area, implemented over two years, should be readily achievable by reorganising our overseas posts in order of priorities now (as opposed to 30 years ago) and by having Australia adopt a lower profile on the international scene. There is no justification for maintaining 8 posts in the USA, 3 in Paris, 4 in Switzerland and 3 in Germany and the largest single post in London, when our opportunities are developing in Asia, South America and Eastern Europe.
| Summary | $m |
| Multilateral aid | 59 |
| Administration | 60 |
| DIFF | 130 |
| Other bilateral | 130 |
| Total | 379 |
ADMINISTRATIVE SERVICES
Major Programmes
| 1982-83 | 1994-95 (est.) | |||
| $m | % GDP | $m | % GDP | |
| Financial, Budgetary, Statistical and Administrative | 902 | 0.50 | 2,102 | 0.47 |
| Net Superannuation Payments | 470 | 0.16 | 1,571 | 0.35 |
| Taxes Paid by Budget Agencies | - | - | -301 | - |
| Total (incl. other programmes) | 1,419 | 0.70 | 3,442 | 0.76 |
The main item of expenditure, estimated at $2.1 billion in 1994-95, is on the running costs and other outlays of departments (or agencies) concerned with non-service delivery function -- Treasury, Tax, ABS, Finance, Customs, Prime Minister and Cabinet, Environment, Sport and Recreation, Administration Services and the Insurance and Superannuation Commission. The "big spenders" in this context are Tax, Customs, the ABS and Administrative Services.
Substantial benefit has resulted from the commercialisation of considerable chunks of the Department of Administrative Services, a significant proportion of whose services are now provided by business units subject to competition from the private sector. Unfortunately, due again to union pressures, the opportunity was missed to adopt a similar approach with Customs. Although the re-organisation of that agency following the Conroy Report is projected to produce some savings once redundancy costs are met, a more commercial approach would likely produce more savings. Accordingly, the reorganisation should be reviewed and a more commercial approach adopted. It should be possible to obtain additional savings of $10m.
More generally, greater emphasis needs to be given in the public service to the use of market-type mechanisms and associated techniques, including separating the roles of purchaser and provider; simulation of competitive market conditions; annual market-testing of a proportion of expenditure; contracting out (including compulsory competitive tendering); vouchers; user charges; devolution of operations to quasi-independent agencies and/or to lower tiers of government; the setting of performance objectives; the establishment of contractual arrangements between Ministers and Chief Executives; and the publication of Citizens' Charters defining citizens' rights to a defined standard of service. (24) An investigation of the scope for greater resort to such techniques could form part of the functions of the proposed Audit Commission.
Such an investigation should not, however, preclude action in the meantime to improve productivity gains in the public service. While Departments have been required since 1987-88 to yield an Efficiency Dividend of 1.25 per cent per annum of running costs (salaries and administrative expenses), the cumulative yield to 1993-94 was only $375m, a tiny fraction of cumulative budget outlays of $594,087m. Given that running costs have risen by no less than 5 per cent per annum in real terms over the last 4 years, there should be scope for a special additional 2.5 per cent Efficiency Dividend in 1995-96. This would save about $300m.
Commonwealth Superannuation
Public servants' superannuation entitlements (other than at the senior levels of the service) are very generous at a 16 per cent (unfunded) employer contribution, against a 5 per cent employee one; with indexed pensions for most, they outdo those for most private sector employees. The cost of retired public servants' benefits is estimated to rise from $1,571m in 1994-95 ($492m for military schemes) to $1,843m by 1997-98. While nothing can be done to reduce these now committed costs, the Commonwealth needs to take action to reduce the future liability on working Australians arising from new entrants into the workforce.
The new superannuation scheme introduced in 1990 -- with a lump sum payment -- is estimated to eventually save $800m. But moves should be made now to reduce the superannuation entitlements of future public servants to the legislated minimum SGC requirement, as the New South Wales Government attempted. This could save hundreds of millions of dollars in future years. Savings at this stage would be minimal, if any, but within a few years would be worth at least $100m.
| Summary | $m |
| Customs -- Commercialisation Measures | 10 |
| Efficiency Dividend | 300 |
| Commonwealth Superannuation | 100 |
| Total | 410 |
ASSISTANCE TO OTHER GOVERNMENTS (n.e.c.)
This "function" includes the general purpose revenue and capital payments which the Commonwealth provides the States to assist them in funding their budgetary outlays on health, education, law and order, and so on. Assistance for general purposes is also provided to local government and, although a specific purpose payment, natural disaster relief is also included here. (Other specific purpose payments are included under the relevant function.)
The decline since 1982-83 in general revenue assistance as a proportion of GDP -- equivalent to a reduction of about 2 per cent of GDP or $9 billion in 1994-95 dollars -- vividly highlights the fact that the Commonwealth has, in effect, financed the 2 per cent of GDP increase in its own-purpose outlays (excluding asset sales) since 1982-83 from the reduction in general purpose assistance to the States. The States have responded by a mixture consisting mainly (relative to GDP) of reductions in their own expenditures and increases in State taxes. The reduction in expenditure (relative to GDP) has been very largely in capital rather than current spending.
Notwithstanding the discrimination and inequity involved in terms of Commonwealth-State relations, the reduction in Commonwealth assistance to the States was justified in terms of both macro- and micro-economic policy requirements. The resultant pressure put on States' budgets has been an important contributing factor to action that has been taken by States to improve the efficiency of both their budget and trading enterprise sectors. This pressure needs to be maintained.
However, at the March 1994 Premiers Conference, the Commonwealth agreed to provide a faster rate of growth in the FAGs by maintaining them in real per capita terms for the next three years. (For the previous three years they had been maintained in real terms only). It also agreed to "one-off" special revenue assistance of $103m to all States, and $40m to Queensland and Western Australia, but the general purpose capital grant ($330m in 1993-94) was eliminated. (25) Excluding the effect of accelerating sinking fund payments by the States, the overall effect is to increase general purpose assistance to the States by 2.5 per cent in 1994-95.
The reforms to State budgetary sectors currently being undertaken in States such as Victoria, South Australia and Tasmania demonstrate that there is considerable scope for improving productivity in those sectors. While some of the productivity gains are of a one-off kind reflecting reductions in the extent of union "capture" of these sectors, it seems likely that further improvements in productivity will be attainable for some time into the future, particularly as changed structures expose the delivery of services to competitive forces to a greater extent. Given this situation, it would be reasonable to expect the Commonwealth, as a major supplier of assistance, both to seek such productivity gains and to share in them.
Accordingly, while the present arrangements were agreed to last for three years, the demands of national economic policy make it appropriate for the Commonwealth again to cut back the growth in general revenue assistance to maintaining the same real level. The case for such a cutback in 1995-96 is enhanced by the fact that generous drought relief is being provided by the Commonwealth. Natural disaster relief payments in 1994-95 are now estimated at $255m compared with the original Budget estimate of $35m. Saving: about $150m.
Assistance for Local Government
There is no case for the Commonwealth to provide funding to local governments, which are a creation of the States and whose functions are distributed, as between State and local levels, differently amongst the States. This assistance is essentially provided for the political purpose of enabling Commonwealth politicians to tell their electorates that they are helping to fund local government.
Abolition of the grants would need to be offset by compensating adjustments to States' general revenue grants. There would be administrative savings for both the States and the Commonwealth. Saving to the Commonwealth Budget, say, $2m.
| Summary | $m |
| General Revenue Assistance | 150 |
| Abolition of Local Government Grants (net) | 2 |
| Total | 152 |
PUBLIC DEBT INTEREST AND ASSET SALES
The main item under the public debt interest function is the payment of interest on borrowings raised by the Commonwealth on its own behalf. Under existing policies at the time of the 1994-95 Budget these outlays were projected to jump to $9.5 billion by 1997-98, an increase of almost 30 per cent on the current year's estimate and 64 per cent up on the interest payments in 1991-92. Given the increase in interest rates since May 1994, it is very likely that this estimate is now too low.
This enormous increase in interest payments reflects, of course, the large increase in Commonwealth borrowings in recent years (and the prospective further increase under existing policies). Between June 1990 and June 1995, Commonwealth debt issued on its own account is expected to increase from around $30 billion to about $95 billion. Thus, in the short space of just 5 years Commonwealth debt will have more than trebled.
It is relevant also that the interest cost of borrowings has been significantly understated by the issue of Treasury bonds at a premium, with that premium then being treated as an offset to public debt interest outlays. Possibly around $1 billion per annum in interest costs has, in effect, been pushed into the future by this strategy, which comes perilously close to being open to the charge of "cooking the books".
The prospective increase in interest costs emphasises the need to speed up asset sales and use the proceeds to reduce debt as well as the deficit. Australia is lagging behind overseas countries in the privatisation process, a process which the World Bank has concluded is one that "can and has worked. This is true for a variety of enterprises in a variety of settings, including in poor countries". The Commonwealth's attempts at privatisation are continually resisted by the union movement, whose last surviving bastion is the public trading enterprise sector. The latest "problem" is with ANL Ltd, but union resistance is clearly holding back the privatisation of the Commonwealth Bank despite the obvious lack of justification for government ownership of banks in a deregulated market. The sale of the Government's 51 per cent holding should produce a price of at least $7 per share, which would yield about $3.5 billion.
A similar situation exists with Telstra. The Government should take a leaf out of the book of the NZ Government. There the privatisation of NZ Telecom has been a considerable success both in terms of improving the efficiency of resource use and in terms of direct benefit to consumers. The sale of Telstra, which recently announced a record profit of $1.7 billion, should yield at least $20 billion.
Given an average interest rate on Commonwealth debt of around 10 per cent per annum, (26) the use of the proceeds of the sale of Telecom, the remainder of the Commonwealth Bank, the ABC/SBS and Medibank Private should yield interest savings of around $2.4 billion by 1996-97 on asset sale proceeds of $24 billion. Also, as the elimination of the deficit in 1995-96 would eliminate the projected need for borrowings of $14.6 billion to fund the projected deficit in 1995-96 and 1996-97, that would save another $1.3 billion in interest. After allowing for loss of dividends from enterprises being privatised, the net savings would be about $2,600m.
| Summary | $m |
| Additional Privatisations (after dividend loss of $1,100m net) | 1,300 |
| Elimination of Deficit | 1,300 |
| Total | 2,600 |
TOTAL SUMMARY
| $m | |
| Social Security | 5,130 |
| Health | 2,324 |
| Education | 900 |
| Housing and Community Amenities | 522 |
| Defence | 600 |
| Culture and Recreation | 894 |
| Transport and Communications | 67 |
| Labour and Employment | 1,387 |
| Prime Minister | 25 |
| Aboriginal Affairs | 155 |
| Law, Order and Public Safety | 88 |
| Foreign Affairs and Overseas Aid | 379 |
| Administrative Services | 410 |
| Payments to Other Governments | 152 |
| Public Debt Interest | 2,600 |
| Total | 15,636 |
CONCLUSION
The savings outlined in this document provide a tangible example of the (large) expenditure reductions which are available to the Government if it is prepared (and determined) to reduce the ongoing Commonwealth Budget deficit.
Nearly all of them could be achieved within a year or two. Some longer-term ones, like sole parent pension and Commonwealth superannuation reforms would take a little longer to produce the full savings, but nevertheless should be introduced now.
Savings of the magnitude here, $15-16 billion, would provide a boost to national savings and assist Australia's economic recovery, without imposing the burden on any one sector of the economy, or any one group of people.
It would also, as noted, focus on reducing Commonwealth own-purpose outlays rather than on assistance to the States. The following table summarises the effect in this regard of adopting my proposals and compares own-purpose outlays in 1981-82 and 1982-83, the last year of the Fraser Government.
Commonwealth Budget Outlays
| Year | Own Purpose (a) | Own Purpose (a) Excl. Asset Sales | Payments to States | Total | Total Excl. Asset Sales | |||||
| $m | % GDP | $m | % GDP | $m | % GDP | $m | % GDP | $m | % GDP | |
| 1981-82 | 26,008 | 16.19 | 26,008 | 16.19 | 15,309 | 9.65 | 41,517 | 25.84 | 41,517 | 25.84 |
| 1982-83 | 31,250 | 18.00 | 31,250 | 18.00 | 18,140 | 10.45 | 49,391 | 28.46 | 49,391 | 28.45 |
| 1994-95 (Budget est.) | 88,981 | 19.54 | 91,431 | 20.08 | 31,652 | 6.95 | 120,633 | 26.49 | 123,083 | 27.03 |
| 1994-95 (After cuts) (b) | 51,243 (c) | 1155 | 77.693 (b) | 17.06 | 29,757 (d) | 6.54 | 81,000 (c) | 17.79 | 107,450 | 23.50 |
(a) Excludes payments to other governments only; in other words, payments to Commonwealth trading enterprises are not excluded.
(b) Assuming all cuts occurred in 1994-95 rather than over 2 years (as proposed).
(c) Includes $24,00Om of additional asset sales proceeds.
(d) Reductions proposed in Payments to the States are Rent Assistance ($40m), Hospital Grants ($690m). Post-Secondary Education ($5OOm), CSHA ($SOOm), Tasmania Freight Subsidies ($5m), Legal Aid ($1Om), and General Revenue Assistance ($150m).
ENDNOTES
1. It might be noted that our EPAC submission for the 1994-95 Budget proposed a reduction of $10 billion, or about 2.2 per cent of GDP, in net public sector expenditure and borrowings in 1994-95. Our press release of 10 May 1994 on the 1994-95 Budget, entitled "Risky Strategy Threatens Tighter Money", argued that the Government's failure to reduce its deficit by more than proposed meant that it "will likely have either to take relatively early action to move to a Budget surplus or to tighten monetary policy".
2. For a further elaboration of this point, see "Debt: What Should Be Done" by Richard J. Wood, October 1989.
3. An income unit is analogous to a family except that nondependent children and other adults living in the same household are treated as one unit.
4. That assumption could be affected if there was a major change in income distribution which reduced living standards in lower income groups. There is, however, no evidence to suggest such a reduction
5. The paying of taxes and receiving them back, in part or in whole, via government assistance.
6. Even allowing for drought detracting about 0.4 per cent from GDP, it now appears that the economy will grow somewhat faster than the 4.5 per cent forecast in the 1994-95 Budget.
7. $250m for "Creative Nation", $220m for additional drought relief, and $20m of income tax relief for maritime employees engaged in international shipping.
8. This assumes that the equivalent of the Loan Council borrowing programme for State works and housing in 1971-72 of $533m (about 1.4 per cent of GDP) would have been advanced in 1994-95.
9. In 1982-83, Commonwealth taxation was 23.8 per cent of GDP and State taxation was 6.1 per cent of GDP. In 1994-95, Commonwealth taxation is estimated at 22.1 per cent of GDP and State taxation at 7.4 per cent of GDP.
10. See, in particular, "Structural Adjustment and Economic Performance", OECD, 1987.
11. "Workforce 2005: The Future of Jobs in the United Sates and Europe" by Alan Reynolds in OECD Societies in Transition. The future of work and leisure, OECD 1994.
12. See "The Bad Old Days?", Backgrounder by Richard J. Wood, 16 October 1994. Central government expenditure is well below 30 per cent of GDP in all the more prosperous Asian countries except Malaysia, where it is just over.
13. Diewart, W.E., "The Marginal Costs of Taxation in New Zealand", Swan Consultants, Canberra, March 1994.
14. Findlay, C. and Jones R., "The Marginal Cost of Australian Income Taxation", Economic Record, 58, 1982, pages 253-266.
15. While the forward estimates in the 1993-94 Budget showed resultant "savings" of $1480m for 1995-96 and $3550m for 1996-97, formally the remaining tax cuts have only been "deferred". The 1993-94 Budget papers stated that "The second round of tax cuts will be determined by the Government at a time when fiscal conditions permit".
16. July 94 DSS recipients JSA/NSA -- 865,000
17. In 1982-83, 86 per cent of the average unemployed were in receipt of benefits; in 1993-94, over 100 per cent received benefits. It is possible that the increase in the participation rate from around 60 per cent in the early 1980s, to around 62.5 per cent now partly reflects such easing.
18. Special Benefit is paid to people who are unable to earn a sufficient livelihood for themselves and their dependants, who are ineligible for any other pension or allowance and who can prove hardship. It is payable at Job Search Allowance rates.
19. This estimate allows for a considerable number of sole parent pensioners moving on to other benefits.
20. Purchasers of pharmaceuticals are already liable to make a contribution. Prescriptions to the general public, for example, are subsidised at a maximum of $16 per prescription item until total expenditure reaches a safety net of $450 per individual or family per year; thereafter at $2.60 a prescription until such additional expenditures (that is, over the $450) reach $135.20 a year; then at no cost thereafter in that year.
21. Notwithstanding the Industry Commission Report, there is a strong case for the States to sell off the public housing stock. The proceeds could be used to pay off debt, and the resultant interest savings would probably more than finance the provision of rental assistance to low-income and disadvantaged groups.
22. It might be noted, however, that, once long-term unemployed complete a labour market assistance program, they are then treated as "normal" unemployed, not long-term, if they do not obtain a job; in other words, there is a shuffling of the unemployed pack which artificially reduces the long-term unemployed.
23. Richard J. Wood in Black Suffering, White Guilt?, February 1993.
24. For further details, see Richard J. Wood, "Improving The Efficiency of the Public Service: Alternatives to the Efficiency Dividend Arrangements", Backgrounder, 13 February 1994.
25. However, the general purpose capital grant for Better Cities is continued (at $260m in 1994-95 compared to $213m in 1993-94).
26. Although the average interest rate on outstanding Commonwealth debt is around 8 per cent, the relevant rate for purposes of calculating savings is the current average rate.
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