Budget Sector Spending

CHAPTER 5

INTRODUCTION

The success of the government will depend crucially on its ability to improve the appropriateness, efficiency and effectiveness of government services.  Most of the goals that the government should pursue -- including reducing State debt, limiting or reducing taxes, reducing the regulatory burden on businesses, cutting back the nanny state, empowering people rather than institutions -- hinge on finding ways in which government spending can be reduced without reducing the quality of services available to the community.  Even in the best of times this is an extremely difficult task, with no easy or painless solutions.  The easy options have already been taken up:  departments have been merged and remerged so often that staff are demoralised;  administrative staff have been reduced in number;  and public servants are already travelling in economy class.  As the recession recedes, and given the last couple of years of restraint, the government should expect new and old demands for spending to burgeon.  But as the following sections show, there exist both the need and scope for additional spending restraint, and the ways and means available to achieve this restraint in an efficient, effective and equitable manner.

LEVEL AND TRENDS IN SPENDING

Spending:  Growth With a Degree of Restraint

Contrary to the claims of successive Western Australian governments and lobby groups, the Western Australian public sector has not been starved of funds or experienced a reduction in spending over the 1982-92 period.  In 1992, spending by the total public sector and the general government subsector consumed the same proportions of the State's Gross Product (GSP) as in I982 (Table 5.1).  Since most other States over this period (even the fiscally delinquent State of Victoria), experienced a reduction in public sector spending as a share of GSP, the Western Australian public sector has, relative to other States, and to the private sector, not been subject to any restraint over the period as a whole.  In fact, adjusted for inflation and population growth, spending by the State government has actually increased strongly over the 1982-92 period, with outlays of the total public sector and the general government subsector growing in real per capita terms by 16 per cent and 17 per cent respectively between 1982 and 1992:

Table 5.1:
Western Australian Government:  Total Outlays

Sector:	Total Public		General Government
	1982	1992	1982	1992
As % of GSP	19.0	19.1	16.4	16.3
Real Per Capita ($)	2526	2940	2147	2511

Source:  ABS Cat. Nos 5501.0, 3106.0 and 5220.0.

As in other States, the increase in spending did slow during the latter half of the 1982-92 period.  This was, however, only after very rapid growth during the first half of the period.  As shown in Figure 5.1, real per capita spending in the general government sector grew very sharply between 1982 and 1984, and reached a historic high level in 1987.  Between 1987 and 1993 (est.), spending in this sector showed no overall increase (although there has been a steady growth in real per capita terms since 1990).

Figure 5.1:
General Government Outlays and Revenue, Western Australia, 1982-1993 (Real per Capita)

Source:  ABS Cat. Nos 5501.0, 3106.0

Spending Beyond Our Means

While it could be argued that there has been a measure of spending restraint in recent years, over the decade as a whole it is clear that Western Australian governments simply allowed their spending to expand as revenues grew;  that is, no serious attempt was made to look at the alternative of tax reductions -- on the contrary, taxes were increased.  Moreover, in the latter part of the period the slowing in revenue growth was not accompanied by an equivalent slowing in expenditure growth, resulting in increased resort to debt financing.  That spending expanded excessively through short-sighted financial management and pre-election pork-barrelling.  As Figure 5.1 shows, between 1982 and 1988, the Western Australian general government subsector experienced a large increase in revenue.  This, as discussed in Chapter 4, resulted primarily from a sharp increase in tax revenue flowing from both the asset boom and higher tax rates and, until 1986, substantial increases in Commonwealth grants.  Rather than use these windfall revenues to reduce the deficit or to save in other ways for the inevitable day when revenue would be curtailed, the government not only spent the lot on recurrent outlays, but increased its level of deficit spending.  When, in 1988, the revenue windfall began to fall away, the government found itself with a much higher spending base than at the start of the 1980s and a declining revenue base, leading to higher deficits.  The State's financial problem was made worse during the late 1980s by the need to bail out financial enterprises.  It is evident, therefore, that there has not been sufficient restraint in spending since 1988 to adjust to the changed circumstances, and as a result deficit spending and debt have grown markedly.  The fiscal problem was further exacerbated by the pre-election budget of 1989, which, despite falling revenue, increased spending in the general government sector by 16.5 per cent and committed the subsequent government to large additional spending increases.  The large budget deficits in 1986 and 1987 were also driven by election-related spending.  It must be stated, however, that during the years of the Lawrence government, spending overall was more restrained than in any other State except Tasmania.  Moreover, except for the large growth in capital spending associated with pre-election, pump-priming policies of both the Commonwealth and State governments, spending growth is, as shown in Table 5.2 expected to be restrained in 1993,

Table 5.2:
Average Annual Growth In General Government Outlays, WA (Real per Capita)

Expenditure	1982-1992 %	1987-1992 %	1992-1993 %
Current	1.3	0.8	0
Final Consumption	1.0	0.4	0
Interest	2.7	4.4	-8
Capital	0.8	-3.4	7
New Fixed Capital	0.2	-5.0	16
Total	1.2	0.0	1

Source:  ABS Cat. Nos 5501.0, 3106.0

Recurrent Outlays Dominate Spending Growth

Over the period 1982-92 recurrent outlays exhibited a significant rate of growth, averaging 1.3 per cent per year in real per capita terms, or 18 per cent over the 10-year period (see Table 5.2).  The rate of growth in recurrent outlays did slow somewhat after 1987, but growth continued nevertheless, expanding by 0.8 per cent per year in real per capita terms between 1987 and 1992.  This growth was driven by two types of outlays:  final consumption expenditure and interest payments.  (Grants to non-profit organisations, which represented less than 10 per cent of recurrent spending, also grew rapidly.)  Final consumption expenditure, which is the single largest type of expenditure (65 per cent of general government outlays) grew, on average, by 1.0 per cent per year in real per capita terms over the 1982-92 period and continued to grow at a slower pace after 1987.  This category is primarily made up of labour costs (about 60 per cent);  the key to restraining its growth, therefore, is the containment of public servant numbers.  Interest payments, as a result of the rapid accumulation of debt and, until the most recent period, high real interest rates, grew more rapidly than any other type or functional area of expenditure.  The interest bill grew, on average, in real per capita terms, by 2.7 per cent per year in the general government sector;  as a result, interest payments in 1992 consumed over 15 per cent of total outlays, and represented the second-largest functional area of spending after education.

Recurrent spending was not projected to grow in real per capita terms in the 1993 Budget.  This was to be achieved by tight control over expenditure, a reduction in public servant numbers flowing from the special redundancy scheme introduced in 1992, a real reduction in public service wages, and sharply lower real interest rates.  Although this forecast outcome may not be achieved, and implementation of the spending promises made during the 1993 election campaign would certainly put them in doubt, it does show the potential for restraint.

Capital Spending Has Been Restrained

In contrast with previous decades, and relative to recurrent spending, capital outlays were restrained during the 1982-92 period.  Capital spending by the general government subsector did grow by 10 per cent over the 1982-92 period in real per capita terms, but all growth took place prior to 1987.  Capital spending was actually cut in real per capita terms by 26 per cent between 1987 and 1992 as part of the government's response to the slowing in revenues.  Data on total capital expenditure derived under the National Accounting framework must, however, be used with caution.  In that framework, asset sales are treated as negative capital outlays;  and given the increasing volume of asset sales over the 1980s, this method would give us an unreliable picture of new investment.  Again under the National Account system, funds advanced to financial trading enterprises -- such as the large volume of funds used to bail out the SGIO and the R&I Bank between 1990 and 1992 -- are treated as capital outlays.  A better picture of the level of new investment can thus be derived from data on new fixed capital investment;  though these data have their own limitations, one of which is that they do not include expenditure on land.  As shown in Table 5.2, data on new fixed capita expenditure indicate that in real per capita terms investment was virtually stagnant between 1982 and 1992, and declined sharply (averaging 5 per cent per year) between 1987 and 1992.

Table 5.2 shows not only that capital spending has borne a disproportionate share of the fiscal restraint imposed on spending since 1987, but provides further support to the argument that borrowing during the 1987-92 period was used to fund increased recurrent rather than capital spending.  During this period, debt in the general government sector more than doubled, whilst capital spending (even after excluding the cost of the bail-out of financial enterprises and other WA Inc losses) was cut by 29 per cent, and recurrent spending continued to grow, though at a slower pace.

The restraint imposed on capital spending during the latter half of the 1980s does not necessarily indicate, however, either an inadequate level of investment in public infrastructure or the existence of a pent-up need for such investment now.  Capital expenditure tends to be "lumpy", and during the late 1970s and early 1980s, the State government undertook a number of large capital works projects, such as the Dampier-to-Perth pipeline, the Muja power station, extensions to various teaching hospitals, and road construction, all of which resulted in excess capacity.  In subsequent years, as these projects were completed, capital outlays appropriately declined.  The State government, in response to fiscal stress, also began to use its physical assets more efficiently and rationally and in so doing was able to reduce total capital spending.  The limited evidence that is available -- and it is very limited -- indicates significant scope for further improvement in the efficiency of existing infrastructure, ⁽⁶⁷⁾ which -- in combination with privatisation -- should allow capital spending to continue to be restrained.  Moreover, the large increase in capital works scheduled to begin in 1993 will go a long way toward meeting any areas of inadequate investment.  New fixed capital expenditure is estimated to grow by 30 per cent for the total public sector and by 16 per cent in the general government subsector in 1993, and this large level of capital works is expected to continue through 1994, as many of the capital initiatives are long-term projects.

INTER-STATE COMPARISONS OF SPENDING

Although always controversial and greatly disliked by governments, public servants and interest groups, inter-State comparisons of spending are an important -- indeed vital -- tool in the assessment of public sector spending.  The proponents of government programmes will almost invariably argue that their needs and programmes are unique and cannot be compared with those of any other jurisdiction;  except of course if the other jurisdiction spends more -- hence the popularity of Victoria as a benchmark during the 1980s.  Although any such comparison must be done thoroughly and rigorously, the Australian States are sufficiently similar in the types of programmes provided, needs to be serviced, institutional arrangements and funding, that inter-state comparison can usefully be made.

Commonwealth Grants Commission

Data generated by the Commonwealth Grants Commission (CGC) provide an excellent starting point for comparing spending and revenue-raising of the States and Territories.  In the process of recommending the distribution of Federal financial assistance grants among the States, the CGC undertakes a thorough and comprehensive assessment of recurrent spending of all States and Territories.  This is conducted in a manner independent of State rivalries and with access to all data -- financial and non-financial.  The CGC's assessment is therefore unique and authoritative.  The CGC assessment covers only recurrent spending, but it goes to great lengths to ensure that a common set of services is compared across the States.

The central output of the CGC is the estimation of standardised expenditure levels for each State and for each category of recurrent spending.  The standardised expenditure is estimated as the amount per head that is required to be spent by a State if it is to provide a level of service equal to the average of all States.  The estimates of standardised expenditures are arrived at by adjusting actual per head spending for factors which are unrelated to policy or efficiency, such as distribution of population and economies of scale, and which make the cost of providing a given service in a State higher or lower than the average of all States or which increase the demand for government expenditure (for example, the relative size of the Aboriginal population).  By comparing the actual level of spending on a per capita basis with the standardised level of spending, a prima-facie indication is obtained of whether a State is operating a 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.  In the CGC's terminology this ratio of actual to standardised spending is called the level of service provision.  (A similar approach is undertaken for the various categories of State revenue and these data were used in Chapter 4 to compare the taxing policies of the State governments.)

A State's level of service provision ratio will be different from unity (1.0) if it pursues policies which are different from the average policy setting of all States.  If a State's service provision ratio is greater than unity, it indicates that it has made a policy decision, whether explicitly or implicitly, to provide either a higher quality of service or a less efficient level of service.  Although the CGC data do not allow differences in efficiency to be separated from differences, if any, in quality of service, a ratio above unity provides a basis for questioning the level of expenditure and for examining other data relevant to making a judgement as to the cause of the difference.

Relationship To National Average

The CGC data on service provision ratios (Figure 5.2) indicate a number of points of relevance to the spending policies of the new government.

Figure 5.2:
Commonwealth Grants Commission Service Provision Ratio(s)

^(a) Service provision ratio is measured as the ratio of actual to standardised recurrent budget expenditures per capita;  with standardised expenditure measured as the amount required by a State to provide a standard level of services adjusted for the State's special needs and disabilities.

Source:

Commonwealth Grants Commission, Report on Tax Sharing Relativities, Vol. II, 1985;

Report on General Revenue Grants Relativities, Vol. II, 1989, 1990, 1991 and 1992 -- Update.

First, they support the conclusion discussed earlier, and drawn from other sources, that the recurrent spending in our general government sector over the last decade was (relative to other States and after taking into consideration Western Australia's special needs) not inordinately restrained.  Specifically, the CGC data show that in terms of total recurrent expenditure, expenditure by successive Western Australian governments was at or close to the average for the States during the 1980s.  Since 1989, the service provision ratio has declined, so that by 1991 (the latest year for which CGC data are available) recurrent spending in Western Australia was just slightly less than the all-State average and at the same level as it began the period in 1982.

Second, the CGC data highlight both the effect of the 1989 pre-election budget and the fact that the restraint shown in 1990 and 1991 did little more than cut spending back to the pre-1989 level.

Third, the CGC data confirm that the Lawrence government pursued a policy of restraining -- relative to most other States -- the growth of spending.  Given the relatively slow growth in recurrent spending undertaken or committed to by the government since 1991, the new government will inherit a level of spending close to the average for the States.

Fourth, the CCC data show that spending levels in Western Australia are much lower than those in Victoria and therefore the new Western Australian government will not -- even if the debt management targets recommended by Reform and Recovery are adopted -- need to reduce spending at anywhere near the same pace or to the same extent as has the Kennett government in Victoria.

The CGC data do indicate, however, that in many areas Western Australia has a very high level of expenditure relative to the all-State standard.  Accordingly, in those areas of expenditure there exists scope for reducing recurrent expenditure without necessarily reducing the quality of service.  Indeed, as shown in Table 5.3 (on the following two pages), the Western Australian government "underspent" (in the sense that its service provision ratio was below unity), in only two main categories of spending:  education (8 per cent or $102 million) and business undertakings (48 per cent or $134 million).

In contrast, the government had an above-standard level of spending per head in all other main categories of expenditure, including:

• culture and recreation (22 per cent or $17 million);
• health (9 per cent or $116 million);
• welfare (7 per cent or $13 million);
• law and order (5 per cent or $20 million);
• administrative services (25 per cent or $24 million);
• community services (69 per cent or $26 million);
• regulation (51 per cent or $17 million);  and
• services to industries (4 per cent or $7 million).

On this basis, there is prima-facie evidence that Western Australia could reduce spending by $240 million without necessarily reducing the quality of services.

Although the level of spending was more variable across sub-categories of spending, in general Western Australia overspent in most (in 34 out of 61 categories) and massively in some (over 20 per cent above its standardised level in 24 categories).

After 1991, the government pursued a restrained fiscal stance relative to most other States;  its service provision ratio has probably, therefore, declined.  In the absence of policy changes, this advantage will, however, be significantly eroded and probably even eliminated over the period of the new government by policy recently put in place, including policies on pre-school education and transport subsidies.  In 1992, the government committed itself to schooling for five-year olds at a cost of about $100 million per year.  As one of the main reasons for Western Australia's relatively low level of spending on education has been its policy of not providing schooling for five-year olds, its introduction will substantially diminish Western Australia's relative cost advantage in educational services.  And, since the electrified urban rail system came on stream in 1992, subsidies to urban transport have escalated dramatically:  increasing by $58 million, or 36 per cent, over 1992 and 1993.  These subsidies are set to grow even more dramatically over the term of the present government with the completion of the northern rail link.  So the underspending in education and business undertakings subsidies will be substantially diminished over the next few years.

Table 5.3:
Comparison of Budget Sector Outlays ^(a)-- 1990-91
Western Australian Relative to All-State average and to Queensland

	All-State (b)		Queensland (c)
	Per Cent	$ Million	Per Cent	$ Million
EDUCATION   Pre-school   Government Primary   Non-Government Primary   Government Secondary   Non-Government Secondary   Technical & Further   Transport of Children   Total Education	29 -13 14 -11 -3 -1 -15 -8	9 -64 11 -47 -3 -1 -7 -102	28 -5 24 43 3 47 -7 16	9 -21 18 117 3 50 -3 173
CULTURAL & RECREATION   Public Libraries   Reference Libraries   Museums   Art Galleries   Other Cultural   Recreation   Wildlife   Total Cultural & Recreation	43 14 25 40 11 42 6 22	3 1 2 1 2 7 1 17	40 46 76 73 -12 151 6 35	3 2 4 2 -2 15 1 24
HEALTH SERVICES   General Medical   Family & Children's Health   Children's Dental   Public Health   Total Health	8 5 55 42 9	99 1 5 11 116	57 77 29 65 57	464 6 3 15 489
WELFARE SERVICES   Child Welfare   Aged/Infirm Relief   Emergeney Welfare Relief   Total Welfare	13 -20 49 7	12 -13 14 13	74 -36 10 11	44 -28 4 20
LAW, ORDER & PUBLIC SAFETY   Police   Business Regulation   Other Admin. of Justice   Corrective Services   Emergency Services   Fire Protection   Other Public Safety   Total Law, Order & Public Safety	-11 -8 10 52 -7 37 -72 5	-24 0 9 34 0 4 -2 2O	4 102 27 69 -47 51 -91 18	8 2 20 40 -3 5 -8 64
ABORIGINAL COMMUNITY SERVICES	0	0	67	11
LEGISLATURE	-7	-3	12	4
ADMINISTRATIVE SERVICES   Auditor-General   Government Printer   Mapping & Surveying   Premier & Treasurer   Public Service Board   Public Works   Taxation Collections   Valuer-General   Total Administrative Services	72 383 22 59 36 -9 -16 92 25	2 0 3 17 3 -2 -3 3 24	122 13SO 2 63 223 -16 -22 -28 20	3 0 0 16 8 -4 -4 -2 20
COMMUNITY SERVICES   Admin. of Crown Lands   Consumer Protection   Ethnic Affairs   Local Govt/Town Planner   Vermin & Noxious Weeds   Total Community Services	0 -3 -37 114 162 69	0 0 -1 16 10 26	15 201 35 311 399 184	1 3 O 23 14 41
REGULATORY SERVICES   Admin. of Industry Training   Environment & Conservation   Labour & Industry   Registry of Births   Transport   Total Regulatory Services	-44 25 99 -169 216 51	-3 3 12 1 4 17	-21 233 51 -344 149 74	-1 10 8 1 4 21
SERVICES TO INDUSTRY   Agriculture   Fisheries   Industrial Development   Mining & Energy   Overseas Representation   Soil Conservation   Tourism   Total Services to Industry	-15 -31 77 0 -20 17 7 4	-11 -4 20 0 -1 2 1 7	3 -5 74 173 -35 57 85 43	2 0 19 24 -1 4 10 56
SUBSIDIES TO PTEs   Metro Transit   Non-Metro Transit:  passengers   Non-Metro Transit:  freight   Coastal Shipping   Country Water & Sewage   Irrigation & Drainage   Total Subsidies to PTEs	-23 -34 -208 475 -31 -69 -48	-35 -15 -73 11 -9 -12 -134	-11 -37 -29 -28 -90 -29	-15 -18 15 13 -8 -48 -60
TOTAL OF TOTALS	-1	-30	31	993

^(a) Includes only recurrent budget sector outlays.

^(b) Calculated as the difference between Western Australia's actual level of expenditure per head and its standardised level per head as calculated by CGC and based on the all-State average.

^(c) Calculated as the difference in actual per capita expenditures between Western Australia and Queensland

Source:  Commonwealth Grants Commission, Report On General
Revenue Grant Relativities for the States, N.T. and A.C.T., 1992 Update.

As indicated, the CGC data provide a strong prima-facie case for questioning the level of spending in a number of areas.  This is particularly true of the 24 sub-categories in which spending in Western Australia was 20 per cent or more above the level of other States, including:

• recreation (42 per cent or $7 million);
• government printer (383 per cent or $0.4 million);
• Premier and Treasury (59 per cent or $17 million);
• Public Service Board (36 per cent or $3 million);
• Valuer General (92 per cent or $3 million);
• local government/town planning (114 per cent or $16 million);
• labour and industry (99 per cent or $12 million);
• industrial development (77 per cent or $20 million);  and
• coastal shipping (475 per cent or $11 million).

Queensland As the Benchmark

Using the CGC benchmark means that comparisons are based on the policies of all States, which results in the double counting of policies (with Western Australia being compared in part with itself), and, more importantly, it includes unambiguously profligate States such as Victoria.  As such, the benchmark is hardly an indicator of "international best practice" toward which a government should aspire.  The most appropriate benchmark for Western Australia, as discussed at length in the previous two chapters of Reform and Recovery, is Queensland.  Queensland has a similar economic structure to Western Australia, and similar potential for economic growth;  its demands for public services are similar to those of Western Australia;  and its fiscal position and policies are those toward which Western Australia should aspire.

As shown in Figure 5.2, Western Australia has a considerably higher level of spending than Queensland.  Throughout the 1980s and into the 1990s, Queensland pursued a policy of relative restraint, with its service provision ratio declining steadily from 0.85 in 1982 to 0.77 in 1991 -- a decline of 8 percentage points.  In contrast, Western Australia started and ended this period with approximately the same service provision level (0.99), so spending in Western Australia grew significantly relative to Queensland.  This result is even more notable in that Queensland started the period with a substantially lower level of spending per capita than Western Australia.

The differences in spending between Queensland and Western Australia across the various expenditure categories are shorn in Table 5.3, which compares actual spending per capita in Western Australia as estimated by the CGC relative to the corresponding level in Queensland.  In 1991, Western Australia spent 31 per cent more -- equivalent to $993 million -- than Queensland on recurrent government services.  Western Australia's comparatively high level of spending was pervasive and, in many areas, truly massive.  One of the most startling differences is in the category of general medical services, which is composed primarily of spending on public hospitals, where Western Australia spent 57 per cent or $464 million -- a sum greater than the expected general government deficit in 1993 -- more than Queensland.  There are numerous sub-categories where Western Australia's comparative level of expenditure was extremely high, including:

• recreation (151 per cent or $15 million);
• child welfare (74 per cent or $44 million);
• corrective services (69 per cent or $40 million);
• fire protection (51 per cent or $5 million);
• Auditor General (122 per cent or $3 million);
• Premier and Treasurer (63 per cent or $18 million);
• Public Service Board (223 per cent or $8 million);
• consumer protection (201 per cent or $3 million);
• local government and town planning (311 per cent or $23 million);
• environment and conservation (233 per cent or $10 million);
• transport (149 per cent or $4 million);
• industrial development (74 per cent or $1 9 million);
• mining and energy (173 per cent or $24 million);  and
• tourism (85 per cent or $10 million).

Even though the spending policies of Western Australia and Queensland have almost certainly converged since 1991, there undoubtedly remains a large discrepancy in the level of recurrent spending of the two States.

Although the picture revealed by Table 5.3 and Figure 5.2 does not allow definitive conclusions to be reached, the difference in level of spending between Western Australia and Queensland provides a key benchmark for the incoming government against which to assess existing spending policies.  First, Queensland's spending policy shows that "small government" is politically possible.  Second, given the thousands of people voting with their feet by migrating to Queensland every year (for example, in 1992 Queensland was the only mainland State to experience a net increase in population from interstate migration), and given the high level of economic growth in Queensland, the quality of essential services is clearly not unacceptable and does not deter the immigration of people and capital.  Indeed, analysis conducted by Wood & Associates on behalf of EPAC concerning the factors contributing to Queensland's lower per capita spending, suggested that the level and quality of essential services in Queensland are not significantly below those of other States. ⁽⁶⁸⁾  Third, Queensland's policy of low spending in conjunction with its policies of low taxes and balanced budget, do not appear to have had a deleterious impact on the economy or job growth;  rather the opposite.  Indeed Queensland is an excellent example of how small government and spending restraint produces what people most expect of (and were most clearly promised by) the new Western Australian government -- economic growth based on keeping the cost of government low.  Fourth, Queensland's spending policies provide an appropriate and invaluable benchmark for assessing the appropriateness, effectiveness, and efficiency of recurrent spending in Western Australia.  Fifth, and importantly, Queensland's spending policies show that the debt management targets outlined in Chapter 3 -- particularly achieving a balanced budget and the attendant restraint on recurrent spending -- can be achieved over time in Western Australia without an adverse impact on the economy.

Western Australia Has a Relatively High Level of Capital Spending

Unfortunately the CGC does not include capital expenditure in its assessment of States' spending and there is no known alternative source of data that isolates the policy differences in capital spending across the States.  Moreover, because of the lumpiness and long life of many public sector capital projects, and the increasing use of alternative and off-budget funding arrangements for public infrastructure, even greater care must be exercised with capital than with recurrent spending when making inter-State comparisons of expenditure.  Moreover, account should be taken of the existing stock of capital as well as annual expenditure on new capital.

During the 1982-92 decade, the Western Australian government spent in the general government sector more per capita, and allocated a greater proportion of its total outlays to capital, than most other States;  indeed greater than all other States except Queensland.  Thus, although capital spending increased by less than recurrent spending in Western Australia during the 1980s, it was even more restrained in most other States.

REINVENTING GOVERNMENT

The most difficult but urgent task confronting the new government is to improve the accountability -- defined broadly to include transparency, appropriateness, efficiency and effectiveness -- of the services provided by government.  The Royal Commission has shown the need to improve the processes of government, particularly the need to make the executive accountable to Parliament (see Chapter 2).  There is also a need to reduce the level of borrowing and other financial liabilities (Chapter 3).  There is a need to limit the burden of taxation, particularly on businesses, and to make the way we pay for services fairer, more efficient and transparent (Chapter 4).  The new government needs to reform a large range of the State's major institutions, functions, and roles (see Chapters 6-11).  And, as discussed in this chapter, there is evidence indicating scope for reducing government programmes and activities, without necessarily causing a reduction in the quality of essential government services.  These reforms constitute a significant challenge for any government;  but they are essential to the efficient functioning of the Western Australian economy.

The Western Australian government is not alone, nor will it need to start from scratch.  The task facing Western Australia is not unique to us or to Australia.  It is common to most countries around the world. ⁽⁶⁹⁾  The government will, therefore, have many companions and potential collaborators on the path of reform;  many examples and lessons to draw from;  and many benchmarks for comparative assessment.  Importantly, the necessary reforms to government are currently under way in other States, or committed to by governments in Australia. ⁽⁷⁰⁾  In fact, many of the necessary reform processes have at least been discussed (if not begun) in Western Australia.

The reform process can be divided into the following four basic components.  First, the government must develop a basic philosophy of and approach to government.  Second, it must identify a set of aggregate financial and performance targets.  Third, it must reform the way government is managed.  Fourth, it must make changes to the institutions of government.

Philosophy and Approach To Government ⁽⁷¹⁾

Essential to the reform process is a philosophy of government which enables us to address questions such as:

• What is government best at, and what is better left to the private sector?
• What are the characteristics of services that should be provided by the public sector?
• Where should government be involved and how can it perform better?
• Which public sector enterprises should be converted to private enterprise?
• Where can we gain advantage from contracting out or franchising the services currently produced by government?
• How should we constrain any potential abuses of monopoly power?

Only by addressing these questions, and obtaining answers can a government develop an agenda for reform.  We note, in passing, that the search for more efficient means of delivering services to the community is never complete, as interest groups will always be pressing for help at public expense.  The fact that the benefits of government largesse are narrowly focused, and the costs thinly spread over current and future generations, means that the cause of reform requires "eternal vigilance".

The Reform and Recovery Philosophy

Government should provide a stable framework

The policy and reform programme set out in Reform and Recovery is based on the premise that the primary function of government should be that of defining and enforcing the laws, rules and regulations governing our society, under a "transparent" parliamentary system.  Government should set the framework within which men and women, individually and in groups, can go about their respective business and leisure activities, spurred on by incentives to do well, and with full accountability under the legal system.  The dynamic processes of change and development which characterise a free society are more likely to be beneficial if stability is provided by governmental rules, including the common law, which are stable and which evolve in a predictable fashion.  But government should not actually be in the business of owning or managing businesses unless the market failure arguments are powerful and there is clear evidence that government can do better.  Equally, government should have only a limited role as an operator or provider of services as distinct from being a funder of these services.

Government should help unfortunate people

Where disadvantage arises, through misfortune, bad luck, illness or disaster, government has both a role to play and the means to make sure that outcomes are fair and equitable.  Financing, but not necessarily delivering, government services -- such as welfare, education, health, and even police -- is a proper activity of government.  Reform and Recovery suggests that the energies of private sector entities be used in delivering welfare services fairly and efficiently (see Chapter 81). ⁽⁷²⁾

Governments should not try to pick winners

The experience of the 1980s shows that government is typically a bad manager of businesses, a poor investor, and perhaps worse, a bad banker, insurer and manager of superannuation funds.  Government may also have harmful effects on employment, where it set the "pace" by imposing or agreeing to terms and conditions of employment and termination which make it hard for many businesses which would employ labour to set up, let alone thrive.

The paradox to explain to many workers is that the effect of overly "generous" conditions of employment in government, and the flow-on to the private sector, worsens rather than enhances employment opportunities.  As an example, attempts to impose artificially high wages and conditions cause employers to choose the high skilled and advantaged, and to stop the less fortunate, and non-conforming, potential workers getting a toe in the door.  Wage floors can thus end up creating injustice for the disadvantaged -- in Western Australia under the banner of a "Social Justice" strategy -- and adding to the welfare budget.

Given these areas of government failure, there should be little surprise in our recommending that government vacate the fields of finance, insurance and superannuation, and many other activities in which private sector provision is demonstrably superior.

It follows that Reform and Recovery seeks a structure in which business, workers and other community organisations take their own risks, and trade in risks (via equity markets), in an environment which is both competitive and accountable.  As part of this process, corporate law and common law must be actively enforced, not least to ensure that confidence is retained in limited liability companies and other devices for risk sharing and the pooling of savings.

Governments should encourage competition, not monopoly

Government need not, and generally should not, own or take over monopolies, nor should government sanction anti-competitive business or union behaviour.  Rather, government should create a pro-competitive environment and ensure that any natural monopoly power is not abused.  Worker organisations, like their business counterparts, will deliver benefits of greater value to their members if the spur of competition is present, and it is a logical role for government to keep competitive pressures alive, not least in the labour market.  Where possible, government bodies such as the industrial commissions, and monopolies contrived by government, should be subject to competition, with workers and employers being free to sign their own contracts and employ their own mutually agreed arbitrators.  In some cases the government agencies should simply be abolished if it turns out they provide services which are either unnecessary or could better be provided federally or by the private sector.

Fund individuals, not institutions

All too often the operation by government of trading enterprises and other government institutions such as State banks, State insurance offices, schools and universities, hospitals, electricity, transport, gas and water utilities is treated as an end in itself.  The role of government should rather be to ensure that such services are provided in an efficient and equitable manner, not necessarily by government itself.  Ultimately, it is individuals as customers and taxpayers who should pass judgement on the performance of service providers.  Those organisations which are deemed poor performers relative to alternatives should be under commercial pressures to reform or close down.

State involvement -- whether regulatory or financial, or both -- should be with the objective of enabling individuals to choose the best way in which they wish to organise their lives.  Individuals should be able to choose between services on an equal footing, with especially-deserving or disadvantaged individuals gaining support through government-funded programmes.

Fundamental to this process is that it is individuals not governments which should directly fund service providers, and so determine their success or failure in a competitive environment.  (As one wit has observed, it is often no more efficient to assist individuals through government institutions than it is to feed sparrows through horses!) Where it is necessary for government to be involved, it should generally charge so that total costs are recovered, and government institutions that do really need to be retained should be in a corporate form to make them more accountable, competitive and efficient in the delivery of services.  In such circumstances, we need competition on the proverbial level playing field, with public sector operators facing the same taxes, charges and regulations as their private sector counterparts.  Where individuals in need are unable to meet the cost of competitive service provision, government should assist them, but not place the whole industry or service under State control in order to contrive cross-subsidies.

OUR APPROACH IN SUMMARY

In summary, governments should set stable rules, assist needy people, avoid commercial involvements, discourage private or public sector monopolies, be funders rather than operators of services, but fund individuals rather than institutions.  Governments must start with what is and will inevitably be influenced by prevailing public opinion.

Putting Theory Into Practice

While there is clearly scope for greatly narrowing the role of government in Western Australia, Reform and Recovery does not advocate an immediate major reduction in government provision of basic services or a "sell-off" of all public assets, Where assets are clearly not natural monopolies, then placing such assets in a form ready for sale is an immediate priority.  In those cases the object will be to secure a market price in terms of the values of the day.

For natural-monopoly assets a case-by-case approach is needed, based on careful and rational analysis of the issues involved.  We note also that, while the case for broad-based privatisation is strong, there are a number of ways in which certain activities currently performed by the Western Australian government could be exposed to private sector incentives, through the following classes of reform.

Corporatisation and capitation

This general approach aims to reproduce private sector incentives, legal obligations and controls, while retaining public sector ownership.  Initiatives here could range from moving away from funding public services directly to a capitation basis (for example, funding schools on the basis of the number of students who enrol), through to full corporatisation, involving clarifying objectives, increasing managerial authority, instituting effective rewards and sanctions based on bottom-line performance.  The shift to explicit commercial goals is intended to achieve production and consumption efficiencies which are lost when non-commercial goals apply or overlap.

There have been major cost reductions achieved in recent years in corporatised entities in the UK and New Zealand.  For example, British Airways, prior to privatisation, transformed its balance sheet from a negative net worth to a value amongst the world's best, based on greatly enhanced profitability.  In Western Australia, Westrail and WAWA have achieved greater efficiency with revamped managements and more commercial goals, though the process of reform still has a way to go in all agencies.  The Industry Commission has undertaken, or plans to undertake, inquiries into electricity, water, rail, ports, housing, and urban development.  Their reports provide a very good framework for further reform of the relevant State authorities.

All this said, political ownership and operation expose a service to lobby group pressures and political owners will always be tempted to intervene, so diverting the organisation from pursuit of commercial to political goals.  They will also find capital hard to provide.  Incentives for superior economic performance are hard to fashion, or to distinguish from rewards for political performance.  A private company is subject to the disciplines of takeover, loss and bankruptcy which cannot be replicated in the public sector.

Promoting competition

Reform and Recovery argues that competition is the key to ensuring that the services wanted by people and business in Western Australia are provided effectively and at least cost.  The most appropriate way of opening up State businesses may vary from case to case.

Exit Government

In some fields where there are already a number of private competitors -- such as insurance, banking, printing -- government should simply vacate the field.

Contracting out

In areas where public services and enterprises are producing "in-house" goods and services for internal use, competition could be introduced by use of contracting out.  Obvious examples include maintenance and cleaning, which are ancillary to the core functions.  But the potential extends beyond that.

Unbundling

In areas where natural monopoly or externality considerations come into play, it is more difficult to ensure exposure to competition, but it is by no means precluded.  Natural monopoly generally only applies to a part of a public enterprise's operations (for example, to electricity transmission but not generation).  Providing competition may therefore require unbundling of separable activities and imposition of common carrier requirements on the natural monopoly component.  Even in respect of natural monopoly elements, competition can be introduced by franchising out for specified periods the operation of public infrastructure (for example, bus and welfare services, or -- as in France -- water and waste water services).

Privatisation

The ultimate means of introducing private sector incentives would be to transfer ownership of assets to private hands.  As outlined earlier, the profit motive and disciplines associated with the markets for shares, capital and managers provide strong incentives to eliminate waste and inefficiency.  Again, however, privatisation is only a means to an end -- the delivery of what users want.  Where markets are not naturally contestable, the benefits from privatisation may be conditional upon the prior existence of appropriate regulations to prevent monopoly abuses.  In each case the government would form a Privatisation Committee, serviced by a specialist unit in the government to make sure that the efficiency and other gains from privatisation would be obtained, and with external commercial expertise being used in the flotation process.  New Zealand and the UK provide good examples of how the process can be done effectively and of how some of the pitfalls can be avoided.

Where existing government enterprises have a natural monopoly, for example, train lines, unique port docking facilities, electricity, water and pipeline grids and so forth, any move to privatisation will clearly involve the implementation of some structure to prevent the abuse of monopoly power.  There are also franchising techniques, as discussed below, which offer competition for the provision of monopoly services.

Regulation of private monopolies

The process of converting natural monopolies to private monopolies, subject to regulatory constraint, is more complicated.  In each case there will be a need for careful attention to the processes needed to protect community interests while the efficiency gains are delivered.  Given the potential for using monopoly power to raise prices, chisel quality, or restrict supply, there needs to be an independent monitor (through a State Pricing Tribunal, as recommended in Chapter 4).

White any regulation will bring a new set of costs, and efficiency losses, these need to be set against the potentially vast savings from reduced spending on white elephants or assets unable to deliver a return commensurate with private sector assets because of political "capture".  So long as these government trading enterprises are not privatised, they will tend to be asked to satisfy political, rather than their customers', needs.

Franchising

Franchising offers the prospect of selling public sector monopoly facilities such as gas pipelines, power grids, and networks of water pipes into common carrier companies.  These could be owned by the State but operate under the company code, with the public grid company calling every so often for tenders for the provision of services on the grid.  Thus we might see competitive transmission services using Western Australian gas pipelines, private sector service companies in the water and sewage treatment areas and privately-owned power stations and distribution companies transacting with the common carrier grid.

Conclusion -- back to basics

There is a strong case for critically re-examining the rationales for government involvement in the wide range of activities currently undertaken by the Western Australian government with a view to a vastly reduced role for government in actually running services and an increased private sector role in the operation, even the financing, of basic services.  This strategy would allow government to focus on providing a stable framework of rules and regulations which allow individuals the opportunity to prosper, while helping those in genuine need.

SETTING THE FISCAL GOALS OF GOVERNMENT

As with business, governments should enunciate clear, credible, and measurable financial goals. ⁽⁷³⁾  There is a need to provide the public, Parliament and businesses with a medium-term financial plan for government activities.  This is an essential part of public sector accountability that has been conspicuously missing in Western Australia and most other States.  In fact, clearly defined and believable macro targets, which show realistic commitments to controlling the level of public spending, taxing and borrowing, will of themselves provide a significant stimulus to private sector investment and growth.  Second, there is a need to provide a discipline and framework for politicians and public sector managers.  Unless there is a limit to the overall size of spending and taxing, there is little hope of getting public sector decision-makers to focus on improving the efficiency of government programmes or to avoid or to cull dud programmes.  It is also more than slightly absurd to ask managers to take a longer term perspective without indicating the objectives and resources which will be required to manage in the longer term.  Third, fiscal targets provide a very important set of performance indicators, which are of particular relevance to election commitments.  As shown in numerous places in this book, one of the main causes of the growth in debt and spending in Western Australia has been the extensive pork-barrelling before and during elections.  It is vital, therefore, that limits be placed on the ability of politicians to promise new spending without simultaneously acknowledging the cost.  It is also important that governments be judged by their performance in meeting commitments made during and after elections.

Ideally, the goals should encompass expenditure, revenue and borrowings, with limits on borrowing being most important.  Experience has shown that efforts to control expenditure in isolation tend to break down after a period.  The key to controlling expenditure is to limit the capacity of governments to raise additional funds by increasing the levels of borrowing and taxation.  Experience also shows that expenditure controls are best set in terms of expenditure per capita and set separately for recurrent and capital outlays;  whilst revenue and borrowing targets are best set in terms of share of GSP.

Detailed targets for borrowing are set out in Chapter 3, which centre on achieving a balanced budget by the end of this term of government (1997).  In the absence of forward estimates of revenue and expenditure it is not possible to set out with sufficient rigour targets for revenue and expenditure that are consistent with the goal of a balanced budget.  It is important that such targets be set, at least in the context of the next (1993) State budget, and based upon the recommendations of the Commission for Audit.

Financial Management and Accountability

Since the late 1970s there has been a continuing series of major reforms to the way the public sector in Australia is managed, particularly to the way public sector finances are managed.  Moreover, the process of reform intensified greatly during the early 1990s and the pace will intensify further over the remainder of the decade.  Although the Victorian, New South Wales and the Commonwealth governments have tended to lead the reform process in Australia, all State governments, including ours, have, at different rates and to varying degrees, adopted the reform. ⁽⁷⁴⁾

The reform process has been extensive, covering all aspects of financial management, and has the potential to affect fundamentally the role, behaviour, and responsibility of all major players, including the Parliament, the executive, and public servants.  The reforms to a large extent evolved from developments in the USA designed to improve the accountability, performance, flexibility and value for money of government services. ⁽⁷⁵⁾  As such they have been an aspect of the general microeconomic reform agenda.

In summary, the reforms have attempted to:

• move control of managerial detail away from central agencies, such as Treasury, to line or operating agencies, such as the Department of Education;
• broaden accountability, through parliamentary public accounts and estimates committees and through performance agreements between ministers and senior public servants;
• involve a wider range of ministers in the budget decision-making process, through such institutions as the expenditure review committees;
• increase the managerial and policy role of senior public servants, through such mechanisms as the senior executive service and performance agreements;
• extend the concept of planning to all aspects of management through corporate plans and programme budgeting;
• give more freedom to managers, by (for example) giving greater discretion to move funds between programmes and types of expenditures;
• increase the responsibility for performance, at all levels of the public sector, through the introduction of management or functional reviews and the introduction of programme evaluation systems and efficiency audits;
• improve the quality and quantity of financial information provided to Parliaments and the public, for example by publishing budgets in common National Accounts format;
• achieve greater consideration of all costs (for example) by imposing charges for intra-government services and imposing user charges;
• broaden the horizon of decision-makers through introducing forward estimates, and accrual accounting;
• put public trading enterprises on a more commercial footing through a programme of corporatisation;  and
• (although not explicitly stated) extend the influence of party political policy into the administrative machinery of government.

Have these reforms produced the goods?  While we cannot be sure of the answer, there are reasonable grounds for suggesting that they have not addressed the core of the problem but have, rather, tended to entrench the existing role of government.  We do know that these reforms have gone badly astray in some places.  In Canada, for example, during the 1970s, there was considerable devolution of authority and decision-making, designed to improve value for money, which backfired badly. ⁽⁷⁶⁾  An Auditor General's report in 1976 found that the Canadian government had lost control of total outlays.  This report led to a Royal Commission and the reimposition of very thorough and detailed financial controls.  Again, for most of the 1980s, the Victorian government led the reform process in Australia, but it also had the worst fiscal record of any State.  As one recent study noted, the Victorian government during the 1980s was "...remarkable for its bold programme of reform and for the magnitude of its economic and political disasters";  and at the end of the decade the "...government had lost control of the system it had established". ⁽⁷⁷⁾  Although during the 1980s the Western Australian government was not at the forefront of the reform process, it did introduce some reforms;  and some of these reforms contributed to WA Inc and the attendant financial losses.  The Queensland experience also casts doubt on the efficacy of such reforms.  Until the election of the Goss government in 1989, Queensland had adopted few of the reforms, but in financial terms they out-performed all other State governments by the proverbial country mile.  More positively, the New South Wales government, which clearly set the agenda for reform during the late 1980s and early 1990s, has produced significant improvements in the financial performance of its trading enterprises and to a lesser extent in its budget sector, and improved the accountability of government generally.  The Commonwealth government also improved its financial performance during the latter part of the 1980s;  an improvement which is credited to the reforms introduced during the 1980s by many participants in the process.

It is the view of Reform and Recovery that the Western Australian government should pursue the reform agenda with vigour but should not regard it as the main game, which we see as the need for a major change in the role of government.  The accountability process has gained too much momentum to be stopped or reversed.  This process can be improved and, with strong political leadership and a compatible philosophy of government, the community will benefit.

One version of the programme of reforms to public sector management in Western Australia has been put forward in Managing for Balance:  A Public Sector Management Strategy ⁽⁷⁸⁾ and in Managing The Business of Government:  A Strategic Approach. ⁽⁷⁹⁾  We consider the approach outlined in these documents to be, in general, in the right direction and to provide a useful starting point.  However, the programme outlined in these documents has a number of weaknesses, some of which are discussed in the following sections.

Strengthen strategic control and focus

One of the main lessons learned from the failures in Canada and Victoria is that devolution of authority and responsibility for the implementation of policy must be undertaken in parallel with tighter strategic controls.  That is, devolution of controls at the "micro" level can only work in a context of coherent and tight controls at the "macro" level.  Failure to enhance strategic controls over such things as the fundamental policy stance and priorities of government allows vested interests to capture programmes, with attendant losses in efficiency and effectiveness;  this capture process is made easier and more thorough by the devolution of micro control.

There are many aspects to enhancing strategic controls.  Some of the more crucial changes are:

• Implementation of target, or "top-down", budgeting.  Cabinet should set targets for the growth in total outlays consistent with the objective of balancing the budget and, in due course, reducing the burden of taxation.  In consultation with Treasury, it should also set expenditure targets for each department consistent with the overall targets.  The line agencies should then be required to submit a budget that fits within their given target setting out options for achieving the target.  The major feature of top-down budgeting is that Cabinet determines the parameters within which the line departments have to operate.
• Imposition of tight cash limits on monthly operations.  Departments and managers should be made to operate under very tight cash limits, and be made to suffer penalties (individually and as a department) if they fail to do so.
• Using forward estimates as an integral part of the budget process.  A programme of rolling three-year forward estimates (current year plus the next three forward years) for capital and recurrent expenditure for each budget agency and the total budget sector, as well as for the estimates of revenue and funding requirements for the budget sector, should be developed and maintained by a central agency.  These estimates should be developed on an unchanged policy basis so that they represent a reasonable estimate of the future cost of existing policies.  Forward estimates should be integrated with the budget process.  Specifically, forward estimates should be produced and published at least three months prior to the release of the budget, so that the public, interest groups and Parliament are better informed about the State's fiscal outlook (see Chapter 2).  Programme statements should be presented in the context of three-year forward estimates and there should be a reconciliation between the forward estimates and revised estimates to show more clearly the impact of policy decisions.  It would also be useful to prepare forward estimates of recurrent outlays on a per capita basis to facilitate interstate comparisons of expenditures.  Further, bills tabled in Parliament should be accompanied by financial statements showing the impact of the proposed legislation on forward estimates.
• Strengthening of strategic institutions.  One of the main functions of central agencies and their ministers should be to ad as "watch dogs" for the general interest and against dominance by special interests.  This role becomes even more vital when implementation and spending decisions are devolved to line departments.  It will be important, therefore, that a high priority be given to strengthening the central agencies and their ministers.  This can be done without any increase in the level of funding.  As shown above, the central agencies, particularly the Public Service Board and Treasury, already have, relative to other States, a high level of funding.  The central or strategic functions of government can best be strengthened by increasing their numbers and ensuring a high quality of staff.  Specifically, we recommend separating the departments of Treasury and Finance and having separate Cabinet positions of Treasurer, Finance and Premier.  This would increase the number and collective influence of the "watch dogs" in Cabinet and its various subcommittees, and in the bureaucracy.

Improving external accountability

One of the main concerns with the reform process is that it has the potential to reduce the accountability of government activities to Parliament and the public.  A central, implicit theme of the reform process is to replace Parliamentary control over line items with greater information over programme performance.  In other words, the objective is to shift the focus of Parliament from inputs to outputs.  There has been a number of specific reforms in recent years, and a number of others are proposed in Managing for Balance and the report (Part II) of the Royal Commission, which should go a long way toward improving accountability to both Parliament and the public, and to facilitate the shift in focus from inputs to outputs.  There are, however, a number of additional changes that should be considered:

• The adoption of a national accounting framework.  All States have agreed to present their budget information on a basis consistent with a national and international accounts framework developed by the ABS -- known as the government finance statistics (GFS) format.  This will overcome a major impediment to the accountability of State finances, which is the lack of comparability between States.  The Western Australian government has, since 1990, presented a summary of the State's finances in the GFS format in a supplementary budget document, and, in line with the agreement, will continue to enhance significantly the amount of information published in the GFS format.  Although this is an improvement, it does not go far enough.  The main accounts and financial reports of the government continue to be presented in a unique, fragmented and confusing format.  Indeed, the State's accounts format ranks very poorly against almost all criteria of good budget practice and rates poorly against the practices employed in all other States and Territories.  This is most clearly shown by the ability of successive Western Australian governments to claim a "balanced budget" whilst in fact incurring very large levels of borrowing.  The solution is to convert the State's public accounts and all its financial reports, as well as departmental ledgers and the reporting system in the central agencies -- in fact the whole government accounting system -- to GFS format.  There win be difficulties in accommodating the conflicting purposes of the accounts, but these problems can be overcome as they have been in other States and the Commonwealth.  The Queensland government, which recently converted to the GFS format, provides a useful model.
• The adoption of accrual accounting.  State accounts are, with the exception of the trading enterprises, maintained on a cash basis in which expenses are not counted until money is actually paid.  This allows government to build up future obligations, such as a repair bill, without any impact on the accounts.  One solution lies in the adoption of accrual accounting, in which any future obligation (for example, a debt, a commitment to pay a pension, a need to undertake repair and maintenance) is counted as an expense for all budget sector agencies, and putting in place a capital management programme.  The New South Wales and Victorian governments are committed to introducing accrual accounting in the budget sector over the next four years.  New Zealand has already adopted accrual accounting for its budget sector.  The process should not be rushed as there is a large range of issues that needs to be addressed, and many of the accounting principles developed for use in the private sector have limited relevance in the public sector.  Nonetheless, a reasonable goal would be to have accrual accounting adopted throughout the budget sector by the end of this term of government.  In parallel with the introduction of accrual accounting, there should be a review of the maintenance needs in the budget sector and a plan put into place to ensure that an adequate standard of maintenance services is met.
• The publication of forward estimates.  Forward estimates are a necessary input to assessment of the State's fiscal position and to the understanding of the performance of government programmes.  Western Australia is currently the only State not to publish forward estimates of any description, and although there are plans to do so in the future, these plans fall short of the recommendation outlined above.
• The publication of a comprehensive financial management report.  The Western Australian government has steadily improved the information provided on its financial objectives, and programmes, but there remains a need for more strategic data in a comprehensive form and in a single document.  The document should include such information as:  debt and other financial liabilities;  departmental performance indicators;  forward estimates, public sector employment;  a statement and analysis of the State's assets and liabilities;  and a detailed comparison of budget expenditure with other States using Grants Commission data.
• The inclusion of a balance sheet in the budget papers.  The Western Australian government has progressively developed and published a balance sheet detailing the assets and liabilities of the public sector.  This is a very positive reform and the development work will continue.  It would, however, be helpful to publish the balance sheet in the budget papers, and in the longer term integrate it with the forward estimates, so as to show the impact of policy decisions on the State's assets and liabilities in the future,
• Improving the Parliamentary committee system.  One of the major weaknesses of the received reforms is that they do not adequately provide for the external assessment of policy, particularly by Parliament.  It is fundamental to our democratic system that governments and public servants have a direct responsibility to account publicly for the effectiveness of their programmes and policies so that outsiders can make judgements about their appropriateness.  The need for external scrutiny is greatly enhanced under the received reforms, which devolve considerable discretion over spending to line agency public servants.  There has been a substantial increase in the powers of the Auditor-General in Western Australia and additional reforms are recommended in the report of the Royal Commission -- which should be adopted in full by the new government.  These do not, however, go far enough.  The Auditor-General is not explicitly empowered to assess and report on the appropriateness of a policy or programme;  rather his powers are restricted to assessing the effectiveness, efficiency and equity of programmes.  In reality it is often impossible to assess effectiveness, efficiency and equity without straying into questions of appropriateness, but Auditors-General have traditionally and rightly steered a careful path well away from questioning policy.  The most important way to improve external scrutiny of government policy is to increase the research capacity of Parliament, and to reorganise and expand the committee system in Parliament.  An obvious model is the Commonwealth Parliament, with its more effective committee system and excellent parliamentary library (see Chapter 2).
• Establishing a Commission of Review of State programmes.  Although Parliament should be the main assessor of government programmes, both it and the government need help.  The Parliament does not currently have the ability or, perhaps, the inclination to scrutinise adequately all government programmes.  It will take a number of years to establish an adequate committee system, and there will need to be major changes to the culture of Parliament and skills of Parliamentarians.  Given the huge growth in the number, scope and cost of government activities and the virtual absence of external scrutiny of government programmes over the last ten years, there is a large backlog of work to be done.  Importantly, there is an overriding need to improve the efficiency and lower the cost of government.

The government should give serious consideration to establishing a Commission of Review, based on the Commonwealth's Industry Commission, to review government programmes as well as other important policy issues such as privatisation, deregulation, and the efficiency and transparency of the State taxation system.  The Commission should conduct its operations in full public view, with public release of the terms of reference, public hearings and public release of draft and final reports.  Although the terms of each reference should be drawn up by the government, the Commission should be given sufficient scope within its charter to raise issues it or Parliament considers relevant.  The Commission should be set up under its own act of Parliament to establish its arm's-length standing vis-à-vis the government.

Clarification of Objectives and Authority

If public service managers are to manage for results, they must know what their objectives and responsibilities are, and they must have discretion over key resources.  The process of clarifying objectives and functions has improved, particularly in the trading enterprises, but there is a long way to go.  Some additional reforms are presented in Managing for Balance, but these still do not go far enough and fail to address certain key issues, such as:

• Making Community Service Obligations more transparent.  The community service obligations (CSOs) of trading enterprises have increasingly been identified and valued;  but the process remains incomplete and there is a need to put in place a common methodology across the State public service.  In the long term, CSOs should be funded directly from the budget.  This should be done either through existing taxes or through levying a new tax, perhaps even a tax on the activities associated with the CSOs.
• Specifying performance agreements and contracts.  Under current arrangements, departments are given too much control over the specification of their own performance measures and targets, with too little concrete direction from government.  This can be rectified:  the Treasurer on behalf of Cabinet should negotiate annual performance contracts with the Minister of each line agency;  while in turn the Ministers negotiate annual performance contracts with the Chief Executive Office (CEO) of each of their departments.  The performance contracts should be published in the annual report of each agency, along with a report on performance outcomes prepared by the Treasurer.  Although the Minister, and CEO, should have significant input to the selection of performance measures and targets, these should ultimately be determined by Cabinet with input from central agencies.
• Giving managers greater control over staff.  Characteristically, over 60 per cent of an agency's total expenditure is composed of salaries.  Yet managers have very limited control over staffing levels, virtually no input into wage levels and working conditions, and limited choice of staff.  If the public sector is actually to manage for results, it must become more flexible and demand-driven in all aspects, including its human resources policies.  Specifically, heads of all agencies should be given full authority, within designated cash limits, to determine the number, classification and deployment of staff employed within their agencies.  Aside from employees within ministerial offices and the agency heads, ministers should have little say in employment conditions.  Further, public servants should be offered terms and conditions of employment which are broadly comparable to the private sector.  There should be a move away from government-wide awards toward greater enterprise- or departmental-based wage conditions.  So, for example, staffing and wage decisions should increasingly be determined by the managers of individual schools, hospitals, or trading enterprises, rather than the Public Service Board and unions.  One consequence is that permanency of tenure should be phased out throughout the public service and gradually replaced by limited-term contracts.
• Monitoring of staff.  While managers must be given greater control over staffing decisions, they should also be required to provide a great deal more pertinent data on staffing.  It will take a number of years to change the management focus from inputs, particularly from staffing levels, to outputs.  In the meantime it would be foolish for the government to relinquish all controls over staffing.  Even if or when the focus of managers and ministers does shift more towards output performance, government and Parliament will still need to monitor staffing levels closely.  Governments are fundamentally non-commercial providers of human services;  staffing costs will always, therefore, make up a large proportion of total costs.  There will always be pressure on politicians and managers to expand or to hire staff for their own sake rather than for their contribution to the services provided.  All agencies should therefore be required to publish regular forecasts of staff numbers, including estimates of attrition, retrenchments and redundancy targets.  The reports should clearly identify the sources of funding for staff expenditures and all associated liabilities including superannuation and provisions for retrenchment and redundancy packages.  A summary of these reports should be published in the budget papers.
• Providing better management incentives.  One of the main reasons for the endemic inefficiency of government is that inefficiency usually coincides with the interest of ministers, bureaucrats and their supporters.  There are few direct incentives for managers and ministers to pursue efficiency and effectiveness in government services, and many powerful incentives to expand government spending.  It is therefore vital that explicit incentives be built into performance contracts to induce all decision-makers to meet budgetary targets as well as service-delivery priorities.  One such incentive is to allow agencies that spend less than their budget limit to keep the savings, and to fine agencies which spend over their budgeted limits.  Performance-based pay for senior managers should also be considered.
• Publishing more informative Annual Reports.  The main source of detailed information on the programmes, funding, and performance of government agencies is their annual reports.  Although there has been a general improvement in annual reports over the last decade, there remains huge scope for further improvement.  Many budget sector departments -- and even some trading enterprises, such as Homeswest -- still produce annual reports that are designed more as advertisements than as an informative assessment of activities.  Indeed the brief two-page statement of activities in the budget papers is often more informative than a fifty-page annual report.  Annual reports also offer a mechanism by which agencies can disseminate statistical information and discuss strategic issues.  Few agencies currently use their annual reports adequately for these purposes.  One way to achieve better annual reports is for the Treasurer and/or the Chairperson of the Public Accounts and Expenditure Review of the Legislative Assembly to specify clearly the types of information and analysis that are to be included in annual reports, and for the CEO and Minister to be called before the Public Accounts Committee to answer questions about the annual report.

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ENDNOTES

67.  For example, using high school facilities at night for vocational training, and greater emphasis on developing multi-functional facilities, for instance, combining libraries and community centres with schools and day care centres.

68.  R.J. Wood, "Efficiency of States Spending", in Background Papers on the Public Sector, Office of EFAC, Canberra, AGPS, December 1990, pages 1-68.

69.  See D. Osborne and T. Gaebler, Reinventing Government:  How the Entrepreneurial Spirit is Transforming the Public Sector, Reading, Massachusetts, Addison-Wesley, 1992.

70.  See D. Nicholls, Managing State Finance:  The New South Wales Experience, Sydney, NSW Treasury, July 1991, Chapter 2.

71.  This and the next section are taken largely from R.J. Wood, [Project Victoria], Victoria:  An Agenda for Change, Melbourne, April 1991, Chapter 2.

72.  R.J. Wood also intends to publish a longer and separate work dealing with community welfare and related matters in Western Australia, later in 1993.

73.  This section draws heavily from J. Craig, "Macro Controls on Public Spending" in Michael James (ed.), Restraining Leviathan:  Small Government in Practice, Sydney, Centre for Independent Studies, 1987, pages 235-258.

74.  J. Halligan and J. Power, Political Management in the 1990s, Oxford University Press, 1992.

75.  Nicholls, op. cit., page 16.

76.  M. Keating, "An Overview of Budget Control" in B, Galligan, J.R. Nethercote and C. Walsh (eds), Decision Making in Australian Government:  The Cabinet and Budget Processes, Canberra, Centre for Research on Federal Financial Relations and RAIPA, 1990, pages 63-66.

77.  Halligan and Power, op. cit.

78.  Government of Western Australia, Managing for Balance:  A Public Sector Management Strategy, Perth, August 1992.

79.  WA Treasury, Managing The Business of Government:  A Strategic Approach, Perth, November 1992.