"The politics of prosperity are no less challenging than the politics of adversity. The biggest challenge of all is to avoid the pitfalls of complacency. Complacency is the giant-killer of Australian politics ..."
-- John Howard, October, 2005
So far this century government in Australia, particularly at the state level, has been relaxed and comfortable. Thanks largely to Hawke-Keating reforms of the 1980s and John Howard's GST, money has flowed to state coffers like pennies from heaven -- plentiful, effortless and with few strings attached.
Since 2000, revenue to the states from the GST has grown at an annual rate of 9.1 per cent, generating a windfall of nearly $5 billion. The GST, together with increases in the states' own taxes, has allowed the premiers to produce both surpluses and the largest increase in government expenditure since the 1970s.
Surging revenues have allowed the states to all but abandon reform. "Reform" is now throwing money at problems and interest groups. What limited reform there has been has been driven by the Commonwealth government.
However, if we do not reform the services provided by state governments the picture will be bleak. Taxes will be higher, more infrastructure will fail and our quality of life will fall.
The report on government services released by the Productivity Commission this week provides little cause for optimism.
Over the past five years, state governments have poured money into public hospitals. Spending grew at an average annual rate of 11.4 per cent per year over the five years to 2003-04. The growth was driven mainly by additional staffing both in number and wage rates.
Despite this huge increase in resources, waiting times in public hospitals have improved little and only in a few states. While Victoria has done the most to reduce waiting time and increase through-put, it achieved this only by a disproportional and unsustained increase in spending.
The problem lays with the failure of the states to change the structure of the system. The states have tied the hands of public hospital administrators with budgetary restrictions. They have reduced the use of competitive tenders among public hospitals.
They have imposed restrictions on staffing levels, such as the maximum ratio four-patient-to-one-nurse imposed across Victorian hospitals. And they have reduced contracting out of public patients to private hospitals. Of course, Australia is not alone in the struggle to restrain health costs and the balkanised structure of the Australian system limits the scope for systemic reform and promotes cost shifting. Nonetheless, the states could and should be doing more to drive value for money in health.
The states have also invested heavily in schools, in particular in teacher numbers and wages, reduced class sizes and more teacher aids. At the same time, the Commonwealth has increased funding for non-government schools thereby reducing demands on the public system.
While there have been improvements in retention rates in schools in some states, there has been little discernable improvement in performance in reading, numeracy and mathematics measured against international benchmarks.
Moreover, despite the heavy investment in government schools, people are continuing to vote with their feet and leave the public system. None of the states are using the cheaper and often better private school system to provide better access, standards and performance.
For all of the rhetoric about state governments investing in "front line professionals" in the form of police, teachers and nurses, the greatest growth in numbers has been in the bureaucracy.
Over the five years to 2003-04, the states increased the size of their bureaucracy by 82,700 staff, representing an increase of 24 per cent. Over the same period, wage rates of public sector managers at the state level increased in real terms by 25 per cent. Victoria was again the most profligate, increasing its bureaucrat work force by 49 per cent.
The growth in state bureaucracies took place in spite of reductions in some administrative responsibilities including taxation, consumer and corporate affairs and energy regulation.
The growth in the state bureaucracies has been driven by a number of factors, including a decline in contracting out, growth in the complexity and number of state regulations and the expansion of central agency control. In short, the states have used the GST bonus to expand the bureaucratic burden rather than reduce it.
The stock response to this is for the Commonwealth to take over. However, the Commonwealth has no skills in running schools, hospitals, police, public transport, prisons or national parks. And the evidence is that replacing the state bureaucracy with federal bureaucracy achieves little.
On the other hand, leaving leadership on reform to the state will not work. Under the existing fiscal arrangements where states spend without responsibility for raising funds, they have inadequate incentives to act in the interest of all taxpayers. Moreover, given the growing influence of public sector unions within the labour movement, state Labor governments are under huge pressure to act in the interest of unionised service providers rather then consumers.
The solution lies with the application of a vigorous competition policy for the services supplied by state governments. And the best form of competition is from the consumer.
The Commonwealth has already moved down this path in reform of employment service, TAFE and aged care. What we must now do is to bring the states into the game and expand the agenda to new areas, including hospitals and schools.
At next week's meeting between the Prime Minister and the premiers, instead of arguing over who should do what, the leaders should agree to an agenda that perhaps for the first time in our history brings genuine choice and competition to our social services. Then we really might start getting value for our money.
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