CHAPTER 3
INTRODUCTION
This Chapter examines the efficiency of current spending by the Budget sector (1) in Victoria. The focus is mainly on the extent to which Victoria might improve its efficiency relative to other States within a framework in which the government sector continues to provide services similar to those provided at the present time. However, some consideration is also given to the scope for shifting more of the responsibility on to the private sector for providing these services. Further consideration will be given to this question in the next report.
We focus mainly on current spending on the three "big ticket" items: health, transport and education. Together these three areas make up over 70% of the total current spending by the Budget sector.
Measuring efficiency of the Budget sector:
The task of assessing the efficiency of the Budget sector is complicated by the fact that there is no clear "bottom line" objective: public health and education systems are not operated with the aim of achieving profit. Further, although efforts have been made in Australia and overseas to develop objective performance indicators to measure output and productivity in specific public sector activities, these necessarily involve subjective judgments about what is capable of being achieved or what is the desirable goal or goals. For example, while Victoria adopted in 1985-86 a productivity improvement policy requiring an annual 1.5% saving in service delivery costs by Budget sector agencies, that does not mean that greater productivity improvements could not have been achieved; nor does it say anything about the appropriateness of the spending base. There are, moreover, possibilities for improving efficiency by the adoption of policies pursued in other States or through greater use of the private sector.
Step 1: Examine the trend of current spending over time.
The Victorian budget sector is, by comparison with most other States, relatively small. Only NSW has a lower proportion of budget sector outlays to GDP and only NSW has a lower proportion of current budget outlays to GDP. Moreover, in line with the trend towards smaller government both in Australia and in most developed countries since the mid 1980's, the relative size of the Victorian Budget sector has been declining in receni years. Since peaking at 15.0% of Gross State Product (GSP) in 1986-87, total Budget sector outlays have declined to an estimated 12.1% in 1990-91. (2)
However, it is important to note that, proportionally, the reduction in capital outlays has been much greater than the reduction in current outlays and the proportion of Victorian GDP allocated to public sector capital outlays has been significantly below that in all other States except NSW. Moreover, it is difficult to assess the extent to which the reduction in the share of State resources going on current Budget sector spending may reflect factors other than improvements in efficiency. Several developments suggest that current expenditure has not needed to keep pace with GDP in order even to maintain standards of services. For example, there has been a decline in real wages (which accounts for a large proportion of outlays) and a decline in the usage of, or need for, some State services (for example, as a result of the shift to non-government schools and the static nature of the school age population). Reductions in the availability of some services (for example, hospital services) suggest some deterioration in overall standards, although this is difficult to assess where access to the services has been made easier and where, as a consequence, demand is stimulated.
One general indicator of a possible deterioration in efficiency is that since 1983 the number of Victorian public servants has increased by over 12%, faster than the increase in population. Thus, at a time when the proportion of State resources expanded by the public sector has been declining, the proportion employed in the public sector has been increasing. This contrasts markedly with the position of the Commonwealth and all other States (except South Australia), where public sector employment has fallen as a proportion of the population. The implication is that the volume of services being delivered per Victorian State employee has decreased. The Table below sets out recent trends in capital and current outlays and public sector employment.
TABLE 3.1:
VICTORIAN GENERAL GOVERNMENT CAPITAL AND CURRENT
OUTLAYS, AND PUBLIC SECTOR EMPLOYMENT
| 1982-83 | 1986-87 | 1990-91 (est) | |
| Outlays (% of GSP) Current Outlays Capital Outlays | 12.3 1.5 | 12.8 2.1 | 12.3 -0.2 |
| Public sector employment (% of population) | 7.9 | 8.5 | 8.3 |
Sources:
For Gross State Product, ABS 5206.0, except 1990-91, which is the athor's estimate.
For capital and current outlays, ABS 5501.0, 28 March 1991.
For public sector employment, ABS 6248.0. Note that the figures refer to September in each year.
Step 2: Small is not necessarily beautiful.
The relatively small size of the Victorian budget sector does not mean that it is relatively more efficient. Victoria has a number of "natural" advantages (3) compared to other States which enables it to provide its citizens with the same standard of services as other States by spending less per head of population while imposing State taxes at rates less, or no higher than, those of other States. The assessments by the Commonwealth Grants Commission indicate that, as regards current spending, Victoria should be able to spend the lowest amount per head while maintaining services at no lower than the average level for the States, that is, if Victoria had even the same sized budget sector as NSW it ought to be providing a better standard of services.
The Grants Commission's assessments of the relative "disabilities" experienced by the various States are a matter of continuing controversy. However, the data and methodology used by the Commission is unique and is probably the most comprehensive available in the world to assess the various factors influencing differentials in State expenditures and the standards of State services. This data and methodology form the basis of recommendations by the Commission which are used to determine the distribution of Commonwealth financial assistance grants to the States. (4) Their use in this Chapter to assess Victoria's current spending is thus solidly based.
TABLE 3.2:
RECURRENT SPENDING BY STATES, PER HEAD
| 1988-89 | 1989-90 | |||||
| Actual ($) | Stand ($) | Difference (%) | Actual ($) | Stand ($) | Difference (%) | |
| NSW | 2018 | 1982 | 1.8 | 2122 | 2111 | 0.5 |
| VIC | 2158 | 1928 | 11.9 | 2309 | 2055 | 12.4 |
| QLD | 1679 | 2179 | -22.8 | 1835 | 2316 | -20.8 |
| SA | 2069 | 2116 | -2.2 | 2195 | 2256 | -2.7 |
| WA | 2306 | 2253 | 2.4 | 2425 | 2393 | 1.3 |
| TAS | 2179 | 2242 | -2.8 | 2367 | 2380 | -0.5 |
Source: Commonwealth Grants Commission, 1991 Update. Spending on debt charges and natural disasters is excluded.
Step 3: Compare expenditure on Budget sector services with expenditure on similar services by other States and by the private sector
As Table 3.2 indicates, Victorian Budget sector current spending was about $2309 per capita in 1989-90, the most recent year for which Commonwealth Grants Commission data exists. (5) While actual Budget sector spending per capita was higher in two other States, Victoria's spending was 12.4% above the level required to deliver a standard level of services, as measured by the Commission. On this basis Victoria had easily the highest level of current spending of any State. It is also relevant that Victoria's relative level of spending has increased over time. In 1980-81 Victoria's recurrent spending was only 3.8% above standard. (6)
By comparing the Commission's "standardised" expenditure figures with actual spending, a prima facie indication is obtained of whether a State is operating the service above or below the average level. However, a State that is spending more per head than its standardised amount is not necessarily providing a better than average quality service: the above standard expenditure may simply reflect inefficiency in service delivery.
Through the examination of various factors contributing to differences between actual and standardised levels of per capita expenditure, it is possible to make judgments about whether above standard expenditure reflects inefficiency or better quality. Comparisons with private sector spending on equivalent services also assist.
Step 4: Did the above standard expenditure by Victoria's Budget sector in 1988-89 and 1989-90 reflect inefficiency or a higher standard of quality?
A large proportion of Victoria's above standard expenditure was due to greater than average staffing and salary levels. At firsl glance, it might seem that this could reflect policy decisions by the Government to provide a higher quality of service. However, there is no evidence to support any such conclusion. Rather, there is considerable evidence to the contrary, and this is considered below.
In any case, even if all the above standard expenditure reflected the provision of a higher quality of services, there would be a question as to whether, given the financial and economic situation of the State, the Government should seek to maintain a higher quality of services.
Step 5: How much can be saved?
Indicative of the level of savings that are possible in the State Budget sector, it is estimated that bringing staffing levels and salaries in education, health and transport into line with the standard for all other States would have saved $988 million in 1988-89.
Holding other spending and taxation levels unchanged, this would have substantially eliminated the deficit of $1027 million (7) for that year. In 1989-90, if Victoria had reduced total per capita spending to its standardised figure there would have been savings of around $1,100 million.
EDUCATION SERVICES
State primary and secondary education are the big-ticket items in the education budget, accounting for about 70% of total current expenditure. Government subsidies to private schools account for another 17% of total spending on education.
Actual and standardised current outlays on State schools for Victoria, NSW and Queensland in 1989-90 are set out in Table 3.3. Victoria spent 26% more on secondary education than required to achieve the standard level of service in 1989-90, and 13% more on primary education. Only in the area of TAFE was actual expenditure below standardised expenditure, and then only by less than 1%. Overall, Victoria's education spending was 14% above standard in 1989-90, equivalent to "excess" spending of over $400 million.
TABLE 3.3:
SPENDING PER HEAD ON STATE SCHOOLS 1989-90 (a)
| Actual $ | Stand $ | Difference (%) | |
| New South Wales Primary Education Secondary Education Total Education | 212 215 657 | 230 215 665 | -7.8 -0.0 -1.2 |
| Victoria Primary Education Secondary Education Total Education | 231 263 739 | 205 209 646 | +12.7 +25.8 +14.4 |
| Queensland Primary Education Secondary Education Total Education | 250 164 614 | 278 253 764 | -10.2 -35.0 -19.7 |
Source: Commonwealth Grants Commission, Report on General Revenue Grant Relativities, 1991 Update
Victoria's above standard expenditure in these areas arose for two main reasons. First, it paid both teaching and non-teaching staff more than the national average. Second, it had smaller class sizes and proportionally more support staff than other States. These factors are examined in turn, based on 1988-89 data.
All categories of staff in the Victorian State Primary and Secondary systems were paid, on average, more than the Australian average.
Calculations of average salary levels for 1988-89 show that Victorian salaries for all categories of staff, both teachers and non-teaching personnel, were well above the Australian average. (8)
This feature is particularly striking for non-teaching school based staff. In all categories of such staff Victoria had the highest average salary level of all States. Non-teaching staff at primary schools were paid, on average, 16% more than the national average. Similarly, non-teaching staff at secondary schools were paid on average 11.3% more than the national average, and for support staff in special schools the figure was 17.5%.
A similar trend emerges in teachers' salaries. Victorian State school primary teachers had the highest average salary level of all States in 1989. At over $34,000 it was 6% above the all-State average. Secondary teachers in Victoria had the second highest average salary level, marginally higher than NSW and beaten only by S.A.. Average salaries of special school teachers were also the second highest of all States, with only Queensland having a higher level. (9)
One explanation for the relatively high average salary levels for Victorian teachers in 1988-89 may lie in the State's relatively heavy reliance on high-cost emergency teachers. (10) However, the higher average salary levels are also consistent with the strong influence of the teachers' unions on the Government and the strong representation of former teachers amongst Government Ministers.
Victoria had smaller class sizes in its State school system than either the Australian average for government schools or private schools in Victoria
The second reason for Victoria's high expenditure on State schools was its relatively high staffing levels. Table 3.4 sets out the teacher/student and non-teaching staff/student ratios for State primary, secondary and special schools in each State.
It is clear that, in all of the teacher categories, Victoria had higher teacher/student ratios than any other State and ratios from 13-20% above the Australian average. Moreover, although the proportion of non-teaching school-based staff to students in Victoria was below average, the cost of the higher teacher/student ratios in Victoria far outweighed the saving from the relatively low ratio of other school based staff to students.
The teacher ratios in government schools were also significantly higher than in private schools -- about 18% higher at the primary level and over 23% higher at the secondary level. Further, while there was a lower ratio of support staff to students in the State system relative to private secondary schools, many of the building staff within the State system were classified under the Property and Services Department.
Are Victorians satisfied with their State school system?
Given that the Victorian Government had higher teacher/student ratios than in either the private sector or other States, and paid its teachers more, one might have expected that Victorians would be more satisfied with their State schools than their interstate counterparts. However, over the decade to 1989 the proportion of the school aged population enroled at non-Government schools increased from 25.6% to 32.8%. Only South Australia, which is also a relatively big spender on State schools, had a higher increase in non-government school enrolments. Further, Victoria now has the highest proportion of its school aged population at non-government schools. (11) This implies that the extra spending and higher teacher/pupil ratios have not produced higher quality education.
TABLE 3.4:
STAFF/STUDENT RATIOS IN THE STATE EDUCATION SYSTEM, 1989
(Staff per 1,000 students)
| NSW | VIC | QLD | WA | SA | TAS | AUST (a) | |
| TEACHING STAFF Primary Secondary Special | 49.7 75.1 198.9 | 62.0 92.7 269.2 | 53.6 73.9 228.6 | 51.7 78.9 174.0 | 60.1 90.2 211.4 | 58.3 88.3 232.6 | 54.9 81.8 225.1 |
| NON TEACHING SCHOOL BASED STAFF Primary Secondary Special | 9.8 15.2 158.2 | 8.5 14.0 57.2 | 11.1 13.4 253.5 | 12.8 19.1 141.5 | 15.4 21.3 89.2 | 17.3 23.7 136.6 | 11.0 15.8 141.9 |
Including ACT and Northern Territory.
Note: All staff and student numbers used to calculate these ratios are full time equivalents.
Sources: Schools Australia 1989 (ABS Catalogue No. 4221.0).
A recent survey by Geoffrey Partington (12) focussing on the reasons why parents move their children from government to non-government schools, tends to confirm this. Although conducted in South Australia -- which, as noted, has also experienced poor retention rates -- the responses are enlightening. The most important reasons given were "concerns about standards of work", and about "the quality and commitment of the teachers". By contrast, "concern about class size" was of little importance.
Some have argued that Victoria's high rate of "drift" is a reflection of the Government's assistance to private schools, thereby reducing the cost to parents of placing their children in the private system. However, Grants Commission data shows that, while Victoria did spend more per head than its standardised level on assistance to non-government schools, the amount is unlikely to have been sufficient to explain the extent of drift (4.2% at the primary level and 12.9% at the secondary level).
How to save almost $300 million on the Education Budget
In 1988-89, large savings would have been available to Victoria if it had reduced its staffing ratios and average salary levels to bring them into line with those of NSW, or -- a less severe change -- the Australia-wide average. (13) If staffing ratios had been at NSW levels, Victoria's spending would have been $261 million lower. A further saving of $13 million would have been achieved if average salary levels had been the same as in NSW.
Would such a reduction in expenditure reduce the quality of State education services?
Whether increasing class sizes by a small amount reduces the quality of education is in some degree judgemental. However, there is now a considerable body of research on the effect of differences in class sizes (teacher/student ratios). For example, a report on the subject published in March 1988 by the US Department of Education, (14) summarized the results of studies undertaken in the USA in the previous 25 years to determine the effects of significant reductions in class size. Its most striking conclusion is that, except in groups of 15 or under, these reductions have made little difference to pupil performance. In Japan, where classes remain much larger than they are in the USA, standardised tests scores have risen.
Nearer to home, Professor Ross Parish quotes (15) the 1973 Report of the Interim Committee for the Australian Schools Commission as recommending funds to reduce the size of classes, but adding that "there is no evidence to show that small classes generally facilitate learning". After surveying the evidence, Parish himself concludes that "low student/teacher ratios should no longer be regarded as evidence of high quality education, but rather as indicative of low teacher productivity". The Report of the Committee of Review of NSW Schools (the Carrick Committee) (16) expressed a similar opinion, noting that: "Available evidence suggests that test scores and other measures of success in certain learning areas are not related to class size"; and, "The research evidence suggests that to get real benefit, class sizes would have to be reduced so drastically as to be financially unrealizable".
A more recent US survey comes to the same conclusion. (17) Among other things, the paper records the result of examining 152 previous studies of the relationship between increases in the teacher/pupil ratio and student achievement. Some 14 of these studies found an increase in student achievement, and 13 a reduction; the overwhelming majority (125) found that increasing the teacher/pupil ratio made no difference (that is, to the pupils).
In Victoria, no evidence has been adduced to contradict such surveys. Moreover, the relatively fast "drift" to the Victorian non-government school system suggests a deterioration in the relative quality of government schooling even though the Victorian private school system supplies education services at a lower cost. At the very least the quality of educational output is no worse in the private sector.
What action should be taken to improve the situation?
Within the framework of the existing system of full government funding of government schools and partial funding of private schools, there is clear scope to reduce expenditure on government schools in Victoria without significantly reducing the quality of education. The main instrument would be through an increase in teacher/student ratios and, hence, an increase in class size. Particularly given the strength of the teachers' unions in Victoria, the implementation of such reductions would require the strong backing of the Premier and Treasurer and should be the joint primary responsibility of the Minister for Education and the Minister for Finance. One step in the process might be an in-depth review, involving close consultation with the various interested parties and public exposure of the issues, along lines similar to that instituted in Tasmania, (18) where substantial reductions in teaching and non-teaching staff have been successfully implemented under a Labor Government.
At the same time, there is also scope to take other action to improve the quality of education, and, hence, the attractiveness of government schools to parents, by decentralising decision-making on staffing and (to some extent) on financing, by instituting a more academically-sound, content-based curriculum, by giving greater emphasis to external independent testing, by implementing major changes to teacher training, and by abandoning the notion that a single certificate (the VCE) can satisfactorily express the "output" of the schools system. There is also scope to give greater recognition to the differing capacities of students by giving more emphasis, as has been done in NSW, to the establishment of "specialist" schools providing for students with different bents and aptitudes. Within the constraints that exist because of the funding arrangements and the absence of pricing signals, the aim should be to create a more competitive environment within the government schools system.
Such action would lay the foundation for other moves towards the further "privatising" of education in Victoria. Consideration should be given to the establishment, initially perhaps on a small-scale "pilot" basis, of a voucher system -- a modest version of which would aim to provide funding for all pupils at a similar rate to the existing average per pupil level of assistance for private schools. A more ambitious scheme would reduce per student payments to government schools by an amount paid directly to the student or parent, with the institution, government or private, gaining revenue if their school is chosen. Quality government schools would be able to attract increased funds, and be far more independent than at present. The incentive for the schools to perform would be sharply increased. Over time, and as real incomes rise in the community, an increasing proportion of children could be then expected to find their way into an (expanded) independent school system.
HEALTH SERVICES
In 1989-90 Victoria spent over $700 per capita on health services, almost 14% more than necessary to provide a standard level of service and the highest actual per capita expenditure even though Victoria is assessed as having the least "difficulties" in providing such services.
Queensland, in contrast, spent about 29% less than its standardised level. Victoria's above standard spending was equivalent to about $370 million. It should be noted that the extent of Victoria's above standard expenditure has increased since 1984-85.
Why did Victoria spend $81 more per capita on General Medical Services (19) in 1989-90 than was required to provide a standard level of service?
Two main potential factors are inefficient use of capacity and labour costs. Although the latest data on inter-state differences in these factors relates to 1985-86, given that there has been only a minor change in overall spending differentials between States since then, it seems reasonable to assume that the factors that explained spending differentials in 1985-86 remained substantially the same in 1989-90.
TABLE 3.5:
RECURRENT SPENDING ON HEALTH BY STATES, PER HEAD
| 1988-89 | 1989-90 | |||||
| Actual ($) | Stand ($) | Difference (%) | Actual ($) | Stand ($) | Difference (%) | |
| NSW | 618 | 595 | 3.9 | 644 | 633 | 1.7 |
| VIC | 647 | 580 | 11.6 | 702 | 617 | 13.8 |
| QLD | 466 | 644 | -27.6 | 490 | 686 | -28.6 |
| SA | 655 | 674 | -2.8 | 703 | 717 | -2.0 |
| WA | 710 | 660 | 7.6 | 761 | 702 | 8.4 |
| TAS | 634 | 663 | -4.4 | 715 | 706 | 1.3 |
Source: Commonwealth Grants Commission 1991 Update.
Capacity utilization
In terms of capacity utilization, the Victorian public hospital system was relatively efficient in 1985-86. It had the lowest number of beds per capita, the highest utilization rate and the highest ratio of outpatients to inpatients across the States.
As such, Victoria's high rate of use of capacity did not explain its high level of expenditure on the public hospital system. Nor did the case mix or quality of health care professionals appear to be a factor.
Labour costs in the Victorian public health system
The reason for Victoria's relatively high expenditure on public hospitals in 1985-86 lay in its staffing policies. These are considered below.
Salaries
Variations in salary levels were not a significant factor in accounting for Victoria's above standard expenditure, salary levels for all staff being only around 2% above average. An interesting feature of Victoria's salary structure, however, was the fact that above average levels applied across all types of staff and for most types and locations of hospitals. This suggests that the above average rates were the result of a policy decision to pay higher rates throughout the public hospital system with little regard to differences in importance or location. The big increases in nurses salaries in recent years also raise a question as to whether those salaries have become excessive relative to the work performed and the potential supply of labour. However, no examination has been made of the level of nurses salaries in Victoria relative to other States.
Total Staffing Levels
Average total staff levels varied significantly across States and were the major factor in explaining variations in labour costs across States. Victoria had the highest total staff level measured by full time equivalent staff per occupied bed at 11% above the average for the six States and the Territories. This compared unfavourably to the other larger States, NSW (-5%) and Queensland (-10%).
Staff Mix
The most striking feature of the composition of Victoria's public hospital staffing levels was the relatively high proportion of administrative, clerical and domestic staff and the relatively low ratio of salaried medical officers and other professional staff. A reduction in administrative, etc staff to NSW levels would have "saved" almost 1,600 staff.
TABLE 3.6:
PERCENT OF PUBLIC HOSPITAL STAFF, 1985-86
| Professional (1) | Nursing | Other (2) | |
| NSW | 21.1 | 42.1 | 36.8 |
| VIC | 13.7 | 45.7 | 40.6 |
| QLD | 15.4 | 50.3 | 34.3 |
| WA | 15.0 | 42.2 | 42.8 |
| SA | 15.9 | 47.6 | 36.5 |
| TAS | 14.6 | 47.2 | 38.2 |
| NT | 14.7 | 44.2 | 41.1 |
| ACT | 15.7 | 45.7 | 38.6 |
| AVERAGE (3) | 15.8 | 45.6 | 38.6 |
Source: Collection of Public Hospital Data from State and Territory Health Authorities, 1986 Commonwealth Grants Commission.
(1) Salaried medical officers and diagnostic, professional and teaching staff.
(2) Administrative, clerical, domestic and other staff.
(3) Simple State average.
As with education, this suggests that the influence of the union movement, which is strong in the health area in Victoria, has been an important influence on staffing levels in Victorian hospitals. Moreover, particularly given that professional staffing levels are relatively low in Victoria (salaried medical staff per occupied bed were 5% lower than the average for the State and the Territories), there can be no implication that higher staffing levels translate to a higher quality service; rather, the contrary.
What Can Be Done?
Within the framework of the existing public health system, there is clearly scope to reduce spending, without affecting the quality of service, by cutting non-technical staff in public hospitals. Given that in 1989-90 Victoria was spending about $81 per head more than needed to provide a standard level of service, there is scope for effecting savings of around $352 million. There may also be scope to review levels of nurses salaries relative to those of other hospital staff and the work performed.
However, given the strength of Victoria's health unions, until major changes are made to industrial relations arrangements such savings are most likely to be achieved by the imposition of strong central control over staffing through the Minister of Finance and his Department, with the backing of the Premier and Treasurer.
The alternative approach of giving more authority to managers of public hospitals, while desirable from a medium term perspective, is unlikely to produce significant practical results in the near term. (20) However, an integral part of reducing costs (and reducing the capacity of health unions to continue to "capture" the system) should be the contracting out of the supply of as many non-technical services (cleaning, food, laundry, etc.) as is practicable.
As regards hospital services themselves, the scope for making greater use of private hospital services is constrained by the Medicare and Commonwealth hospital funding arrangements, which provide for free hospital care in public wards and free outpatient treatment and thus act as a disincentive to private health insurance. However, given that private hospital services are generally provided at a lower cost, (21) there would be scope to effect savings by contracting out to private hospitals the supply of services in respect of private patients who would otherwise go into public hospitals. It is proposed that a pilot scheme be instituted along these lines. Contracting out of public patients would, however, require a change in the Medicare, etc. arrangements if it was not to further reduce the incentive for private insurance.
TRANSPORT SERVICES
Victoria spends more than any other State subsidising its rail and bus services:
In 1989-90 about 11% of the Victorian Government's budget outlays went on meeting the deficits of its metropolitan and non-metropolitan transport services, equivalent to about $268 per capita or nearly $1,167 million. As Table 3.7 indicates, this was by far the highest of all States and compared unfavourably with the other major States, NSW ($226 per capita) and Qld ($87 per capita). Moreover, for each of the three transport services Victoria's spending was significantly above that needed to meet the standard for the States, with total expenditure on transport deficits being $74 per capita more than standard, (22) equivalent to $322 million. To put this in perspective, Victoria's "excess" expenditure on transport deficits was nearly two and a half times as large as the $130 million expended on family and child welfare services in the same year.
Deficits incurred on public transport may be defended on the ground that public transport can be treated as a "public good", that is, that it has positive effects on individuals other than the consumer of the service and would be under supplied if left entirely to the private sector. For example, public transport reduces the congestion costs of motorists (including pollution), and the absence of satisfactory pricing for the usage of roads may justify some subsidies to public transport as a means of limiting expenditure on roads.
However, while there is a public good aspect to at least some of the service provided, a significant component falls outside the "public good" category, and hence should be assessed on a profit criteria. Moreover, it is not clear why there should be a greater "public good" involved in public transport in (say) Melbourne than in Sydney -- if anything the contrary might seem likely. Thus, even granting a public "good" component in public transport, there is a need to keep costs down to (at a minimum) no more than the amount needed to maintain the quality of the services in Victoria at a level comparable to those of other States.
TABLE 3.7:
TRANSPORT DEFICITS -- PER HEAD 1989/90
| NSW | VIC | QLD | |||||||
| Actual $ | Stndsd $ | Difference % | Actual $ | Stndsd $ | Difference % | Actual $ | Stndsd $ | Difference % | |
| TOTAL | 226 | 199 | 13.6 | 268 | 194 | 38.1 | 87 | 154 | -42.4 |
| Metrop. Transit (1) | 126 | 134 | -6.0 | 165 | 123 | 34.1 | 70 | 95 | -26.3 |
| Non-Metro Passenger | 37 | 32 | 15.6 | 43 | 38 | 13.2 | 32 | 26 | 23.1 |
| Non-Metro Freight | 63 | 33 | 91.0 | 60 | 33 | 81.8 | -21 | 33 | na |
| SA | WA | TAS | |||||||
| Actual $ | Stndsd $ | Difference % | Actual $ | Stndsd $ | Difference % | Actual $ | Stndsd $ | Difference % | |
| TOTAL | 92 | 169 | -45.6 | 89 | 146 | -39.0 | 62 | 143 | -56.6 |
| Metrop. Transit (1) | 99 | 98 | 1.0 | 61 | 85 | -28.2 | 34 | 68 | -50.0 |
| Non-Metro Passenger | 19 | 38 | -50.0 | 17 | 28 | -39.3 | 4 | 42 | -90.5 |
| Non-Metro Freight | -26 | 33 | na | 11 | 33 | -66.7 | 24 | 33 | -27.2 |
Source: Commonwealth Grants Commission 1991 Update.
(1) Includes all net operating expenditures (including debt charges but excluding depreciation and superannuation payments) together with operating subsidies to private bus operators. Also includes Brisbane City Council transport undertakings.
Why does Victoria spend much more than it needs to on metropolitan transit services?
Above-standard expenditure on metropolitan transit services was $42 per capita or $183 million in 1989-90. Analysis of four of the main factors affecting spending differentials in 1988-89 (23) -- labour costs, operating efficiency, lower fares, and debt charges -- indicates the following conclusions:
The net remuneration paid per employee was almost 5% less in Victoria than the all-State average, that is, wage and salary differentials are not a major factor;
Operating inefficiency was a major contributing factor to Victoria's relatively high expenditure on metropolitan transit, resulting in Victoria's spending being $19 per capita more than standard. This poor efficiency was particularly evident in the delivery of bus and tram services, which accounted for nearly 40 per cent of total above standard expenditure. In particular;
- under utilisation of private bus services, which are significantly cheaper to operate than public bus services, accounted for a substantial component, (24)
- inefficiencies in traffic operations for trams accounted for $35 million of expenditure above standard, reflecting the fact that trams cost more per vehicle hour to operate;
- Victoria had the least efficient metropolitan rail operations, involving over $40 million in above-standard expenditure in 1988-89. Gross inefficiencies in station yard and signal operations as well as excessive crew costs were the major contributing factors.
Historically, part of Victoria's high spending on deficits of metropolitan transit services has been due to operating with lower fares. This is illustrated by the fact that Melbourne is the only city in which the ABS index for urban transport costs has risen slower than the CPI since the mid 1980's. (25) This policy decision has meant that there has been a lower average revenue yield per passenger-kilometre. (26) Note that recent fare increases in Victoria have probably gone a substantial way to eliminating this differential.
After operating inefficiency, higher debt-charges are the most significant policy cause of variation in expenditure across the States. In 1988-89 Victoria had easily the highest level of debt charges attributable to metropolitan transit.
One explanation for Victoria's high debt charges is its heavier investment in inner-city facilities which yield low returns on capital invested. Another factor is Victoria's policy of leasing back metropolitan transit equipment. Since the funds received from the lease-back arrangements are not necessarily used for metropolitan transit purposes, the debt charges for Victoria may overstate its true metropolitan transit debt. (27)
It thus appears that Victoria's relatively higher level of budget expenditures on metropolitan transit deficits is predominantly a result of the relatively inefficient, high cost use of resources.
Victorian Non Metropolitan Transport Services should operate at full cost recovery.
In the case of rail freight the problems in the Victorian (and NSW) system have long been recognized. In 1989-90, above-standard expenditure on rail freight was $27 per capita, equivalent to $117 million, and in comparison, the Qld and SA rail freight systems made a profit while WA losses were negligible. The Commonwealth runs the rail freight systems of SA and Tasmania, under the aegis of the Australian National Railways, at a profit. Victoria's losses in real per capita terms increased, however, over the four years from 1985-86 to 1989-90 by nearly 20%, the highest of all after States after NSW. (28)
We do not believe that these losses can be justified on the grounds that rail freight services are, in some sense, a public good. As the Commonwealth Grants Commission pointed out:
"The four State governments involved (in providing rail freight services) have each made policy statements to the effect that rail freight transport should in the future move towards operating on a commercial basis. That is, the users of such services should normally pay the costs. It would seem to follow, and we would independently advise, that the experience of a large and chronic rail freight deficit is a policy decision", pg 35 CGC (1985). (29)
In 1988 the Commission decided to exclude rail freight operations from its assessments, a decision which was supported by the Victorian Treasury. The clear implication is that there is scope either to eliminate the many inefficiencies identified in rail freight operations, (30) or to vacate the field to private road transport.
In the case of Non-Metropolitan Passenger Services Victoria spent $187 million, or about $43 per capita, subsidising such services (31) in 1988, about 3% above standard.
This is more than the Victorian Government's total budget outlays on care for the aged and infirm. Victoria has experienced relatively high growth in spending in this area, and there has developed an increasing gap between "needs" and actual expenditure. In fact, Victoria is the only State to experience a real increase in per capita outlays in this area, and has gone from a below standardised to an above standardised spending State between 1985-86 and 1989-90. (32)
The major source of Victoria's over spending has been an insufficient revenue raising effort. (33) Victoria was the only State to have below average fare levels in 1988-89, indicative of price distortion and attendant misallocation of resources.
On several grounds there appears no basis for a "public good" argument for continuing to run non-metropolitan passenger rail services at such a large loss. Rather, the evidence points towards non-metropolitan passenger transport essentially providing a private good.
First, unlike urban transit, the level of additional costs associated with alternative forms of transport, that is road congestion, pollution, or road damage, is small.
Second, the large losses incurred have more to do with bad pricing policies than an attempt to reflect any positive externality associated with the provision of these services. The core of concessional passengers creates over-use by this group (Booz Allen found that in NSW, 10% of the users accounted for 60% of trips); (34) standard fares bear no relationship to operating costs; and higher loads because of low standard and concessional fares creates the need for additional investment.
Third, the IAC (35) found that the main reasons for continuing with loss making non-metropolitan passenger train services were that they assisted local development and maintained local employment opportunities. These reasons are clearly based on political rather than economic grounds.
How to save a million dollars a day on the Transport Budget
There is clearly a need for a radical overhaul of the Victorian Government's involvement in the operation of rail, tram and bus transport services. It is apparent that, merely by taking action to bring the efficiency of operations into line with the average for other States, a substantial reduction in the budgetary cost, which is running at around $1.2 billion per annum, could be achieved. On the basis outlined in the preceding sections, following is a possible program of savings that could have been achieved in 1989-90:
- Operate rail freight services to eliminate above-standard deficit: (Estimated saving = $117 million) (36)
- Reduce the deficit on non-metropolitan passenger services by about one-third: (Estimated saving = $65 million) (37)
- Reduce inefficiencies in metropolitan passenger services, particularly inefficient work practices, and eliminate above-standard expenditure: (Estimated saving = $183 million)
TOTAL SAVINGS: $365 MILLION
(EQUAL TO ABOUT A 30% REDUCTION IN THE DEFICIT).
As with education and public hospitals, such a program would clearly involve substantial reductions in staffing and, as such, would require the strong support of the Premier and Treasurer, as well as community support. It should be emphasised, however, that a program along these lines would leave the present structure of the public transport system largely unaltered. Clearly, reform needs to be more extensive with greater emphasis being given to the substitution of private for public transport across the range of services. It is particularly evident that there could be increased resort to private bus services in lieu of some metropolitan tram and rail services, and in lieu of some country passenger rail services. In addition, there appears to be scope to rely to a greater extent on private road freight transport.
Moves in this direction will doubtless be criticised on a variety of "social" cost grounds. However, such criticisms need to be weighed against the costs of operating transport within a public sector that is heavily prone to influence by sectional pressure groups, both employee and consumer, and which have the potential -- all too often realised in practice -- to impose very considerable costs on the rest of the community and to seriously reduce international competitiveness.
CONCLUDING COMMENTS
What has happened since 1989-90:
The data used in this Chapter relates mainly to 1988-89 and 1989-90, with the conclusion being reached that, based on 1989-90 data, there was scope in that year for reductions in current spending levels of over 12.4%, or about $1.1 billion, concentrated in the education, health and transport areas.
TABLE 3.8
POTENTIAL SAVINGS
($ Million)
| Schools | 356 |
| Hospitals | 352 |
| Transport | 365 |
| All Areas (1) | 1100 |
(1) Includes all areas of recurrent budget expenditure except roads, housing debt charges and natural disasters.
The question arises as to whether the slower growth in recurrent spending provided for in the 1990-91 Victorian Budget (38) would, if achieved, be likely to significantly alter the foregoing conclusions. Analysis of 1990-91 States' budgets suggests that, even if Victoria's current spending were to increase in 1990-91 at the all-State average rate, spending would be "only" about $200 million higher. It seems clear therefore that Victoria's spending in 1990-91 remains well above standard.
There is in any event a question as to whether the 1990-91 Budget expenditure targets will be reached. In a statement of 21 February 1991 the Treasurer claimed that expenditure was running below budget and that further measures were being taken to reduce expenditure to cope with an expected revenue "shortfall" of around $200 million. However, at the same time the Treasurer acknowledged that the budget proposal to reduce 8000 jobs was not even half way to being achieved and the increase in recurrent spending in the first seven months was 2.0 percentage points higher than the estimated budget increase. Difficulties are evidently being experienced in cutting public transport employees and, in the area of education, the government has bowed to industrial pressure from teachers, with the result that cuts in teachers are likely to be minimal. Given that the Budget was based on economic forecasts that are now evidently far too optimistic, current outlays may well be higher than estimated in the Budget.
It should also be noted that our conclusion as to the scope for spending cuts in 1989-90 is based on comparing Victoria with the all-State average or standard level of spending. While this is useful in providing a benchmark for identifying and quantifying possible savings in expenditure, it is a somewhat narrow reference point. After all, as all the States operate at varying degrees of inefficiency, their average is hardly the ideal. Indeed, comparisons such as the Booz Allen study of the performance of the NSW freight and country passenger rail services, (39) together with recent research published by EPAC, (40) suggest that many State public sector enterprises are operating well below best world standards. Moreover, if comparisons were made with the lowest spending State (Queensland), the potential for savings by Victoria would be much higher.
Further, where comparative private sector data has been available -- for example, for teacher/student ratios or bus services -- these have pointed to even greater levels of over-spending than that suggested by the Commonwealth Grants Commission data. Thus our estimates of the possible budgetary savings that Victoria could make are probably significantly understated.
A strong case for major change:
The message from this Chapter is clear. If the areas of health, education and transport are taken together, Victoria is the highest spending State and could cut spending by a large amount without significantly affecting the quality of service. In the area of transport, this overspending is importantly due to inefficiencies in operation, particularly in the area of rail and tram services. In the area of education, it is due to overstaffing of teachers. The balance of evidence suggests that, particularly within a small band, increases in class size have no effect on the quality of education output. Victoria's relatively high level of spending in health is predominantly a result of its relatively greater number of non-technical staff.
The achievement of such cuts will require a concentrated effect by the Government, involving strong support by the Premier and Treasurer and the direct involvement of the Finance Minister with the relevant spending Ministers. A process similar to that adopted by the Tasmanian Labor Government in cutting education expenditure may be beneficial in combating the inevitable opposition from consumer and union pressure groups.
Either as part of the process of cutting spending along the lines suggested, or as a separate exercise, the Government should move quickly towards the creation of a more competitive environment in regard to the supply of the key services of education, hospitals and transport. This should involve the creation of greater competition between government units and, most importantly, a greater private sector involvement.
In our view there is considerable scope for the State Government to implement reforms along lines outlined in Chapter 2 -- that is, by "unbundling" or contracting out sections of these services to the private sector -- without any changes in Commonwealth policies.
Such changes might include:
- The provision of education vouchers at a value equal to the per pupil cost of assistance to private schools, or some fraction of the current cost of government schools;
- The contracting out to private hospitals of services for private patients of public hospitals; and
- Greater use of private transport services in regard to metropolitan and country passenger movements, and the carriage of freight.
ENDNOTES
1. The Budget sector includes all public sector activities except those that are operated predominantly on a commercial basis and achieve full (or almost full) cost recovery on operations. However, public trading enterprises contribute dividends to Budget revenue and thus help finance other expenditure from the sector
2. Estimate based on ABS 5501.0 of 28 March 1991.
3. In particular, higher population (except for NSW) to spread overheads, greater compactness, and higher per capita incomes.
4. For further consideration of the issues, see Efficiency of States Spending by the author, published in Background Paper No. 7 by EPAC, December 1990. It is a frequent complaint by Victoria and NSW that they lose out in this distribution procedure because a portion of Commonwealth income tuxes collected in these two States is, in effect, redistributed amongst the other States and the Territories. According to Victorian Budget Paper No. 2 for 1990-91, the "subsidy" paid by Victoria to States other than NSW amounts to $717 million. It needs to be understood, however, that this redistribution process is similar to that which would occur if there was no Federation and only one main, central tax collecting Government. That Government would then collect more taxes per head from the richest areas -- because of their higher incomes -- and would spend less per head on providing basic services in those areas because of the generally lower costs of providing services there.
5. It should be noted that this data includes current expenditure only. Capital expenditure is not considered in this chapter. The analysis by the Commission covers 80-90% of current spending included in ABS data.
6. Commonwealth Grants Commission, Report on State Tax Sharing and Health Grants 1982
7. ABS 5501.0, 28 March 1991
8. For further details, see Efficiency of States Spending, op cit.
9. Recent efforts to bring teachers salaries into a national scheme may reduce some of these variations across States.
10. See Report on Ministerial Portfolios, Victorian Auditor-General, May 1990: 98
11. This may partly be explained by Victoria's relatively high income per head. However the variations in enrolments relative to income levels across States suggest this is not a major factor. For example, NSWs income per head is only marginally lower than Victoria's, yet the proportion of students enrolled in State schools is much higher.
12. Why Parents Are Choosing Independent Schools, Education Monitor, Autumn 1990.
13. For further details, see Efficiency of States Spending op cit. Note incidentally that if an above-average State were to reduce its ratios, or expenditures, to the present Australia-wide average, that would in fact result in it continuing to be above the (new) average. In other words, to equalize its position with the average of the other States would require it to equalize with the 5-State (or 7-State, including the A.C.T. and the Northern Territory) average, not the 6-State (or 8 State) average of which it is itself a part. In the case of a small State such as Tasmania this point may not be of great importance; in the case of a relatively large State such as Victoria, however, it is in fact quite significant.
14. Class Size and Public Policy: Politics and Panaceas, US Department of Education, March 1988
15. Quoted in Spending and Taxation: Australian Reform Options, (National Economic Priorities 1987)
16. Carrick Committee, September 1989: pp130.
17. The Impact of Differential Expenditures in School Performance, published in Educational Researcher (May 1989) and quoted in Efficiency And Inefficiency In The Texas Public Schools, National Centre for Policy Analysis, USA.
18. See Cutting Costs Without Cutting Quality, by Mike Richards, Education Monitor, Autumn 1991.
19. Expenditure on GMS constitutes about 97% of total current outlays on health and includes all expenditure on hospitals and allied services, nursing homes and psychiatric institutions and community health services not classified to other categories. It includes amounts financed from Commonwealth specific purpose grants.
20. It should be noted that a major factor in Queensland's relatively low level of expenditure on public hospitals has been the strong central control exercised over staffing levels by the Queensland Treasury.
21. According to the Australian Private Hospital Association, hospital costs per occupied bed day in private hospitals in 1988 were about 30% lower than in public hospitals once all costs were taken into account (National News Report 1989)
22. Commonwealth Grants Commission 1991 Update.
23. Details are not yet available for 1989-90.
24. In his report for 1989-90 the Victorian Auditor General estimated that the cost of operating MET bus services is 48% higher than for contracted private bus services, equivalent to an additional cost of $12.8m p.a. While this partly reflects the concentration of public sector services in the costly radial routes from the Melbourne city centre, inefficient work practices were also a major factor. For example, MET drivers could not undertake maintenance and cleaning duties when not required for driving duties, a restriction which did not apply to private bus drivers.
25. ABS 6401.0
26. Ibid, Commonwealth Grants Commission, 1990 Update
27. It should be noted that lease-back arrangements, apparently entered into to circumvent global borrowing limits for State authorities under Loan Council arrangements, are a high cost form of borrowing. These lease back arrangements are discussed in greater detail in Chapter 6.
28. Ibid, Commonwealth Grants Commission, 1990 Update
29. Report to the Commonwealth Grants Commission on Railways and Metropolitan Transit, 1985. Commonwealth Grants Commission Report. Report on Tax Sharing Relativities 1985, Volume II -- Appendixes and Consultants' Reports, AGPS, Canberra, Amos, P.F..
30. See Efficiency of States Spending, op. cit.
31. Commonwealth Grants Commission, 1991 Update: 480.
32. Commonwealth Grants Commission, 1991 Update.
33. Amos, Ibid, 1988
34. Booz Allen & Hamilton, Ibid, 1989
35. Industry Assistance Commission, Inquiry into Government (Non-Tax) Charges, Public Rail Services. Information Paper No. 5, 21 February, 1989.
36. Note that for 1990-91 the program structure has changed so that corporate services for freight has been put into a separate program. This accounts for the apparent "improvement" in the deficit estimate on freight operations in 1990-91 in the Victorian Budget papers.
37. As with freight operations, the program structure has changed in 1990-91, accounting for the apparent "improvement" in the estimated deficit on country passenger services in the Victorian Budget papers (see footnote 37).
38. Based on data published in ABS 5501.0, 28 March 1991, the budgeted increase in 1990-91 of 5.7% is lower than the all-State average of 7.4%
39. Booz Allen and Hamilton, Ibid, 1989.
40. The Size And Efficiency Of The Public Sector, EPAC Oct 1990.
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