Vol. 5, No. 1
SUMMARY
Since 1989-90, the Commonwealth Budget has deteriorated from a surplus of 2.2 per cent of GDP to a deficit of about 4 per cent of GDP. Spending has increased by 16.5 per cent in real terms and public service employment by 7.8 per cent. Over the same period the economy grew by 2 per cent (real). So much for Keynesian stimulatory policies!
Now that the economy has started to recover, the deficit must be wound back so that private sector growth is not stifled by increased interest and exchange rates. It is not sufficient to achieve a deficit of 1 per cent of GDP by 1996-97, as the Government proposes. The aim should be a small Budget surplus by 1995-96.
This should be achieved by spending cuts, not tax increases. The main target should be Commonwealth "own purpose" outlays, which are 2 per cent of GDP higher than when Labor assumed office in 1982-83, and where there has been a major erosion of control in order to buy the support of special interest groups. The aim should be to reduce such spending by 1 per cent of GDP per annum in each of the next 3 years.
This paper details cuts to Commonwealth spending totalling about $9 billion over the next two years, plus $9 billion in additional asset sales over the next three years.
INTRODUCTION
Since 1989-90, there has been a major deterioration in the Commonwealth's budgetary position, with the overall balance moving from a surplus of $8.0 billion (2.2 per cent of GDP) to an estimated deficit of about $16 billion (4 per cent of GDP) in the current year. Over $11 billion of this deficit is estimated to be on current account, that is, the Commonwealth is borrowing over $11 billion to finance current expenditures, including interest costs of about $5 billion. The $24 billion deterioration -- the largest in the Budget since World War II -- reflects a massive $22.7 billion increase (over 16.5 per cent in real terms) in outlays over the three years since 1989-90. Employment in the Commonwealth Budget sector has increased from 148,000 in 1989-90 to an estimated 159,500 in 1992-93, a rise of 7.8 per cent. Moreover, the "underlying" Public Sector Borrowing Requirement for 1992-93 has recently been revised from an estimated 5 per cent of GDP to 6 per cent (or about $24 billion), (1) which would make it the highest since the record 6.9 per cent figure for 1983-84 and over 5 percentage points of GDP higher than the underlying PSBR in 1989-90. (2)
While the increase in spending has been due in large part to the recession and the resultant increase in unemployment, changes in economic circumstances make it difficult to estimate how much of that has been "cyclical" (see below). That aspect apart, however, it certainly reflects revenue and expenditure measures taken by the Government in a largely fruitless endeavour to impart a short-term stimulus to the economy. (3) On the outlays side, the most important of these measures were:
- Additional funding for roads and rail transport announced in One Nation -- $1,000m;
- Increased labour market and training programmes -- $900m;
- Local capital works programme -- $350m;
- Increase of $6 per fortnight in pensions and family allowance supplement -- $450m p.a.
Some of the increase in expenditure is, to a degree, cyclical -- that is, it will be wound back as the economy recovers. In addition, however, there have been major structural increases in the deficit on the revenue side reflecting, in particular, personal income tax cuts which have reduced revenue by the equivalent of about 2.5 per cent of GDP over the three years.
Now that economic activity (though not employment) has started to recover, the Government appears to have recognised that there is a need for the Budget deficit to be wound back and, hence, to reduce the Commonwealth's draw on savings. Such a strategy is, of course, essential in the medium term in order to ensure that the private investment that will provide the basis for jobs growth is not "chopped off" by increased interest and exchange rates, as has tended to happen in the past. Indeed, it will help reduce real interest rates from their still-high level, thus providing a positive stimulus to new investment.
It is also important to recognise that the present policy of "deficit neglect" may not even be "stimulatory" in the short term. As the OECD emphasised last December, "it is difficult to see how consumer and business confidence can be restored unless the authorities deal effectively with unsound public sector financial positions". The IMF Managing Director also stated recently that where "public sector deficits have been allowed to develop ... it is necessary without delay, and without being haunted by the fear of short-term contractionary effects, to convince the markets of governments' resolve to attack the problem by taking vigorous, immediate measures". These statements, and the decisive action by President Clinton and US Congress to start reducing the US Budget deficit, reflect the fact that "deficit neglect" appears to have done nothing to stimulate private sector recovery overseas, leaving the clear implication that it may be counter-productive,
However, by contrast with the earlier stated objective of returning to a Budget surplus, (4) Treasurer Dawkins (after initially dismissing concerns about the deficit altogether) has now stated only that the Budget deficit will be brought down to 1 per cent of GDP (equivalent to about $4 billion in 1992-93) by 1996-97, after cuts in personal income tax estimated to cost about $8 billion in that year. Whether the Treasurer envisages that this will occur without the need to cut expenditure or to increase other taxes is not entirely clear. Some of his statements suggest that he is of this view, which would imply a "cyclical" component of the deficit of the order of 4.5 per cent of GDP. (5) Most private sector forecasters, however, are estimating that, assuming that the only policy change would be the 1995-96 and 1996-97 personal income tax cuts, the Budget deficit in 1996-97 could still be around 2.5 per cent of GDP, equivalent to about $10 billion in 1992-93 (or $13 billion in 1996-97), implying a smaller cyclical component.
Moreover, the recent spate of press speculation about possible options for increasing taxes suggests that Government "sources" are trying to soften up economic and other commentators to accept that there is no more scope to cut spending and that tax measures will need to be taken to reduce the deficit; that is, there is an implication that the Government does not really believe that there will be an "automatic" reduction in the deficit to 1 per cent of GDP. Meantime, the Canadian Government recently announced extensive measures to cut public sector spending over 5 years in response to growing concerns about the level of Canada's external liabilities (which are in fact a smaller proportion of GDP than Australia's) and its Federal Budget deficit. (6)
In any event, the 1 per cent of GDP deficit "target" set by the Government should not be accepted. A policy objective of producing, and then maintaining, a Budget surplus would increase the scope for private investment to increase while minimising the blow-out in the current account deficit and external debt, and the likelihood of a return to high interest and exchange rates. It would help offset the adverse effects on private sector saving of other Government policies, especially from the extension of social welfare to middle income groups and the still relatively high marginal tax rates. It is to be hoped that the report commissioned by the Treasurer from Dr Vince Fitzgerald on national savings options will address the desirability of aiming for a Budget surplus as one contribution to increasing saving.
The Treasurer has also foreshadowed a new approach to States' borrowings which envisages that the annual Loan Council meeting would attempt to agree on the total net draw on savings by the State public sector and the public sector as a whole; that is, agreement would be reached on drawings on existing financial assets as well as new borrowings. Such an approach will require that the Commonwealth justify its proposed net draw on savings for 1993-94 at the June Loan Council meeting. Clearly, as the sector responsible for about 4.5 per cent of GDP of the 1992-93 PSBR, the Commonwealth will need to assume responsibility for most of the reduction in the public sector's net draw on savings.
In addition to rejecting the 1 per cent of GDP deficit target, there should not be any acceptance that Commonwealth outlays cannot be "cut" to any significant extent. While estimated Commonwealth Budget outlays of $110.5 billion in 1992-93, or 27.4 per cent of GDP, are about 1.4 percentage points lower than in 1982-83, they are currently 3.6 percentage points higher than the recent low reached in 1989-90. Moreover, Commonwealth general government (7) "own purpose" outlays in 1992-93 are estimated at around 19.5 percent of GDP, which is 2 percentage points higher than when the Labor Government assumed office in 1982-83 (see Table 1 on the back page). Over the same period total Commonwealth assistance to the States has decreased from about 9.6 per cent of GDP to just over 7 per cent of GDP. In short, the reduction in the share of national resources taken by the Commonwealth Budget since the Labor Government assumed office in 1982-83 is more than accounted for by the reduction in assistance to the States. The Commonwealth cannot therefore claim to have "cut" its own outlays: indeed, the contrary is the case. Does anyone really believe that the level of spending (as a proportion of GDP) by the Fraser Government in its last year on its own purposes was appropriate? -- still less the higher level now? (8)
Leaving aside such historical comparisons, however, the case for cutting outlays rather than increasing taxes derives from the obvious adverse incentive effects of increasing the tax burden and the favourable effects from a potentially more efficient use of resources. As a simple matter of common sense, smaller government is better than higher taxes provided this can be achieved in an equitable and efficient manner. It is difficult to avoid the conclusion that, particularly in the last three years, the Commonwealth has developed considerable "fat". There appears to have been a major erosion of control over own purpose spending, with new programs being developed or old ones expanded as a largely political response to the recession and, in particular, to try to either "buy" the support of various special interest groups and/or to soften the criticisms of such groups.
It is true that the Commonwealth's Forward Estimates suggest that, on a no policy change basis, Commonwealth Budget outlays would fall from 27.4 per cent to around 25 per cent of GDP by 1996-97 (see Table 2). However, such forward projections have to be taken with a heavy dose of scepticism. They have already been overtaken to some extent by promises made in the election campaign, after the Mid-Year Review, which are estimated to add $400-500 million to outlays in each of the next 3 years. They do not, in any event, alter the case for taking action to reduce outlays in order to reduce the deficit. Even keeping the increase in Commonwealth outlays to the same rate as inflation, that is, holding the real level of outlays constant at the bloated 1992-93 level, would involve a reduction in presently projected outlays in 1995-96 of about 1.5 per cent of GDP.
Accordingly, it is proposed that the Commonwealth Government should make the maximum possible effort to reduce spending progressively over the next three years, at the rate of about 1 per cent of GDP per annum cumulatively, so that by the third year (1995-96) the total cuts should be the equivalent of about 3 per cent of GDP, which is equivalent to about $12 billion in 1992-93. This should be sufficient to achieve a small surplus in 1995-96. This objective should be announced at the June Loan Council meeting, which should aim for a comparable reduction in the underlying PSBR. In addition, the Commonwealth should aim to reduce Commonwealth debt by around $9 billion in 1992-93 prices over the three year period from the proceeds of asset sales not already foreshadowed.
The following summarises possible cuts to Commonwealth spending by function for the first two years, totalling about $9 billion in 1992-93 prices, together with possible additional asset sales of $9 billion over 3 years.
Total Summary
| $M (1992-93 Prices) | |
| Social Security | 2078 |
| Health | 1534 |
| Education | 572 |
| Housing and Community Amenities | 497 |
| Defence | 350 |
| Culture and Recreation | 378 |
| Transport and Communications | 160 |
| Industry Assistance | 195 |
| Labour and Employment | 591 |
| Prime Minister | 44 |
| Aboriginal Affairs | 180 |
| Other Economic Services | 30 |
| Law, Order and Public Safety | 71 |
| Foreign Affairs and Overseas Aid | 283 |
| General and Scientific Research, Nec | 105 |
| Administrative Services | 467 |
| Payments to Other Governments | 253 |
| Total Savings in "Underlying" Deficit | 7793 |
| Public Debt Interest (including from additional privatisation) | 1100 |
| Total Reduction in Outlays | 8893 |
| Privatisation (additional asset sales to those planned) Sale of all Commonwealth Bank Federal Airports Corporation Telecom (Part of) Total Privatisation | 3000 500 5500 9000 |
| Total Reduction in Deficit over 3 Years | 21600 |
Detailed cuts by function, as per Budget Paper No. 1, are set out in the following sections. The approach adopted is far from being of the "slash and burn" variety. Rather, it consists of proposals that:
- Target welfare assistance more closely so as to concentrate it on needier groups, and put greater emphasis on self-help or family-help, so as to reduce dependency;
- Concentrate Commonwealth activities more within departmental structures rather than in separate, empire-building quangos which cater to and foster special interest groups;
- Reduce or eliminate taxpayer-funded assistance to special interest groups which have no or only limited justification in terms of national or welfare interest;
- Reduce duplication of activities with the States where there is no, or only a limited, national economic or welfare requirement for Commonwealth intervention;
- Seek greater private sector involvement in the promotion and support of research and cultural activities in particular; and
- Generally seek to encourage private sector saving and a more efficient use of national resources, including by contracting out or privatising government services.
SOCIAL SECURITY AND WELFARE
This is by far the largest Budget item and the most important area that needs to be tackled. The Budget estimate for 1992-93 is $37,943 million (34.5 per cent of total Budget outlays) which is $11.6 billion or 14.4 percent higher than outlays as recently as 1989-90.
One of Australia's structural problems is the deficiency of savings. In no area of Commonwealth policy is the anti-savings bias stronger than in the social welfare area. Inadequate targeting and the discouragement of "self-help" erode the incentive to save -- why save when the State will look after you?
| Outlays Per cent | GDP Per cent | |
| 1972-73 | 20.7 | 4.69 |
| 1976-77 | 26.4 | 7.29 |
| 1982-83 | 28.7 | 8.25 |
| 1986-87 | 27.2 | 7.84 |
| 1989-90 | 30.0 | 7.12 |
| 1992-93 (est) | 34.5 | 9.28 |
Hence, the need is to ensure that benefits are properly targeted: that they are concentrated on those who need them and that they do not discourage "self-help". The Labor Government has improved the targeting of social welfare in some areas. Nonetheless, over two decades, social welfare has continued to take up an increasing proportion of Budget outlays and GDP:
While this latest surge is largely due to the recession, it is evident that to stop the continued upward drift requires a much more determined effort to implement structural reform of the system.
Of course, the politics of radically reforming the social welfare system are unattractive to politicians whose natural (for some, highest) loyalty is to their own re-election. However, substantial savings are possible if a realistic approach is adopted to social welfare targeting in the interests of reducing welfare dependency and improving saving. The following highlights changes in recipients of major benefits, and in the average benefit, since 1982-83.
AVERAGE BENEFIT PAYMENTS (Per Annum)
| Year | Age Pensioners | Invalid Pensioners | Unemployment Benefits | |||
| Nos (000s) | $ /Hd | Nos (000s) | $ /Hd | Nos (000s) (a) | $ /Hd | |
| 1982-83 | 1,417 | 3,180 | 277 | 3,851 | 536 | 4,200 |
| 1991-92 | 1,482 | 6,693 | 487 | 7,354 | 770 | 8,744 |
| $ Incr | 5 | 19* | 76 | 8* | 44 | 18* |
* Percentage increase after allowing for increase in CPI.
(a) Note that the number of unemployment beneficiaries is usually less than the number unemployed.
Source: Department of Social Security, Annual Report, 1991-92.
UNEMPLOYMENT BENEFITS
The number of people currently on unemployment benefits (Job Search Allowance and NEWSTART Allowance) is about 900,000, of which around half are on the long term (more than twelve months) Newstart benefit. Outlays for this purpose were estimated at almost $7 billion in the 1992-93 Budget, but the Mid-Year Review increased this estimate by $570 million in the light of the downward revision in the forecast for economic growth. At 1.9 per cent of GDP, benefits to the unemployed are about 0.6 percentage points of GDP higher than in 1982-83.
The fact that the rate of unemployment (now 10.9 per cent) is higher than at any time since the 1930s naturally attracts considerable and understandable concern about the economic and social costs. It is necessary, however, to keep the situation in perspective. In particular, the increase in unemployment over the past ten years is largely due to the increase which has occurred in the proportion of the working age population seeking work.
Also relevant is the fact that the proportion of the working age population that is employed has actually increased over the past decade and is about the same as it was in the early 1950s. From this perspective the labour market situation, while not improving, has not deteriorated and the increase in unemployment can be attributed largely to a range of influences that is inducing more people to enter the work force. Among such influences would be the 18 per cent increase between 1981-82 and 1991-92 in the real level of unemployment benefits, which overseas research shows to be a major determinant of the rate of unemployment.
A series of measures designed to reform the unemployment benefits system was announced in the 1991-92 Budget. The objectives were of the carrot and stick kind -- carrots in the form of real help in finding jobs for those who want them and, for the work-reluctant, sticks in the form of testing work intentions more rigorously. Perhaps of most interest was the provision that those unemployed for over twelve months lose automatic access to the unemployment benefit. (9) Such people must go onto a NEWSTART Allowance, but to get it they need to go through intensive interviews and accept help in finding work. However, these changes did not promise significant savings and it is evident that the reforms were not expected to have more than a modest effect on the numbers on benefit. Yet if they are properly designed and forcefully administered they should have a significant effect.
A more firmly administered NEWSTART style programme could cut into numbers on unemployment benefit, tackling in particular those who are voluntarily unemployed (that is, left their jobs) and those who are using the unemployment benefit as a pension (that is, some of the long-term unemployed). Any onus-of-proof impediments to NEWSTART achieving this should be removed. In February 1993, 12.2 per cent of the unemployed, or about 128,000, were unemployed because they had left their previous job. Over 360,000 of the unemployed had been unemployed for over a year.
Because the number of unemployed has swelled so much, by over 100 per cent in 3 years, the review procedures have been under a great deal of strain -- notwithstanding increased staff numbers. The apparent stabilising of unemployment numbers provides an opportunity to increase review activities and also tighten the activity/work test (for example, by requiring written confirmation from potential employers of a job request). This should be able to reduce unemployment beneficiaries by 5 per cent or 45,000, saving $350 million p.a.
Measures to tighten access to unemployment benefits should, of course, be accompanied by measures to improve the operation of the labour market and, in particular, to allow maximum flexibility to employers and employees to negotiate individual contracts.
BENEFITS FOR MIGRANTS
The Department of Social Security has estimated that $400 million of social security benefits is being paid to migrants who have been in Australia for less than two years.
Last year the Government introduced a six month (residency) qualifying period for migrants to be eligible to receive benefits. This is estimated to save $20-$30 million p.a. in unemployment benefits alone.
This qualifying period should be increased to two years for non-refugee immigrants. Such an extension would also have the effect of reducing pressure on the immigration programme as the incentive to emigrate provided by Australia's generous welfare system would be diminished. Potential savings over time from this measure would be an additional $150 million per annum.
SOLE PARENT PENSIONS
Australia offers one of the world's most generous sole parent pension schemes, which is costing around $2.8 billion p.a. compared with assistance to families with children of around $2.6 billion p.a. The USA provides support for the first 12 months, while even cradle-to-grave welfare social democracies like Sweden grant assistance for only 3 years. Australia provides income support for children up to 16 years. When the Government also provides generous child care support and family assistance for a working parent, this length of support is clearly excessive. Prolonged welfare payments tend to keep the parent out of the workplace, causing a loss in employment skills and hence adding to the difficulty in regaining work. An appropriate policy would be to cut eligibility to age 6, which over time and with safety nets (such as the provision of unemployment benefits) would save $500 million p.a. net.
UNIFORM AGE-PENSION AGE
With women living longer than men and taking a more active role in the workforce, there is no justification for the continued discrimination on age eligibility for age pensions. Men do not receive an age pension until age 65, but women currently become eligible at age 60. The age for women should be progressively increased to match the age for men at 65. This would save at least $50 million per annum in the first instance, increasing over time.
Once the age eligibility is the same, a move should also be made to increase the age pension eligibility for all Australians to 70 by raising the eligibility age by one year every two years. This will help cope with the cost of an ageing population which is also living longer.
INCREASED BENEFITS WAITING PERIODS
Particularly as the economy recovers, the Government should ensure that unemployment benefits (Job Search Allowance) and substitutes (Sickness Allowance) are not considered an automatic first stop. There is currently only a 1-week waiting period for these benefits (except for school leavers who are subject to an extra 12 weeks). This period should be extended to at least 3 weeks other than in cases of real hardship. Special Benefits would be available in such cases. This 3-week period would provide a net saving (after allowing for Special Benefits costs) of at least $100 million on Job Search and an extra $50 million on Sickness Allowance.
REMOVING THE 4-WEEK LIMIT ON THE LIQUID ASSETS TEST FOR BENEFITS
Lifting the current 4-week deferment on benefits eligibility for those in excess of the Liquid Assets Test provisions for beneficiaries would mean that those who have large redundancy payments, but otherwise qualify for benefits would have to wait longer (dependent on the value of those Liquid Assets). Extending this cap would see individuals having to use up more of their redundancy payments (which exclude rolled-over superannuation) -- the purpose for which they are paid -- before receiving JSA. An average of 8 weeks' extension for these people would save $120 million per annum.
WIVES OF DISABILITY PENSIONERS
Wives of Disability Support pensioners are currently entitled to a pension because of their spouse's status. There is no requirement that they be actively involved in caring for their spouse. If one partner can work, then unless they are required at home as a carer they should not be eligible for support. This pension benefit should cease for all wives under age 50 not actually undertaking a full-time carer's role. Those under 50 who are required to act as full-time carers would be eligible for a Carer's Pension in their own right. This measure would save at least $100 million p.a.
DEFERRED PENSIONS
As the compulsory retirement age is being removed the Government should be encouraging those people who are able, active and willing to work to continue as long as they like. The pension age is now over 12 years less than the life expectancy (at pension age) for men and 20 years less for women. A deferred pension scheme which granted increased pension benefits in lieu of extra years of work/deferment to entitlement could save considerable money with an ageing population. A bonus rate of 8 per cent per year of deferment, assuming an average two year deferment for 10 per cent of newly eligible pensioners, would save $100 million after a couple of years and grow over time.
ENFORCEMENT OF AGE PENSION RESIDENCY REQUIREMENTS
The DSS should cease granting special benefits in lieu of aged pensions where age pension aged people have not been residents for 10 years. The law requires a minimum of 10 years residency to be eligible for the retirement pension and granting the special benefit instead makes the law ineffective. The full intention of the law should be enforced and 10 years residency should be required for retirement pensions or alternates. This would save over $50 million per annum.
DISABILITY SUPPORT PENSIONS
Better targeting of the Disability Support Pension is needed to ensure that this benefit -- as with Sickness Allowance, and Sole Parent pension -- does not become a de facto unemployment benefit but without the work test. The number of recipients has grown by 9 per cent last year, despite increased review activity. More regular reviews of those pensioners with lower impairment rates would ensure the speedy return of many of them to the workforce. Moves by the State Government in Victoria to clamp down on their Workcare system have produced marked results, but some of this success is being carried by extra Commonwealth payments like this one. Even a meagre 3 per cent cancellation rate, achieved through targeted increased review and more frequent medical checks, would save $90 million p.a.
CHILD CARE
The cost of taxpayer-funded child care is set to explode, as did publicly funded "free" health care in the early 1980s. Indeed, child care funding has already grown rapidly over the past few years (from $215m in 1989-90 to $535m in 1992-93) and, with election promises, is set to escalate further (to $860 million by 1995-96).
Prime Minister Keating's comment during the election that child care is not welfare could not be further from the truth. Publicly-funded child care, whether through fee relief, rebates, or operating subsidies, is a blatant example of middle-class welfare.
If the Prime Minister had included a realistic means test on his cash rebates proposal (along the lines of the Family Allowance one), that would have reduced the cost of the proposal by $30-$40 million per annum.
But what is really needed for Child Care is a new approach which links child-care relief directly with the taxation of earnings from employment. It is the employment status which renders the child care necessary. The Taxation Institute estimated that a tax rebate could be provided for under $100 million (on top of the then-existing fee relief). If a rebate was struck at 25 cents in the dollar and claimed through tax, and other fee relief was abolished, the taxpayer would save over $300 million.
RENT ASSISTANCE
In the last Budget the Government abolished the rent assistance waiting period for age and other pensioners and other allowees. This decision goes against the grain of earlier attempts to target welfare. This decision should be reversed, which would save $118 million p.a.
Summary
| $m | |
| Unemployment Benefits | 350 |
| Migrant Benefits | 150 |
| Sole Parents | 500 |
| Uniform Age Pension Age | 50 |
| 3 Week Benefit Wait | 150 |
| Removal Liquid Assets Cap | 120 |
| Wives of DSP | 100 |
| Deferred Pension | 100 |
| Age Pension Residency | 50 |
| Disability Support Pension | 90 |
| Child Care | 300 |
| Rent Assistance Waiting Period | 118 |
| Total | 2078 |
HEALTH
MEDICAL SERVICES
If Australia is to continue to have a national health care system along the lines of Medicare, there is a strong case for most users of services to pay at least part of the cost. The earlier proposed (but then abandoned) co-payment for Medicare doctor visits was a worthwhile reform directed towards reducing the usage of medical services (per person usage increased by 15 per cent between 1984-85 and 1990-91) and limiting the cost of public health care. A co-payment levied at $5 per visit, subject to a $250 per annum family safety net, could yield significant savings and help reduce over-servicing and encourage private health insurance. Pensioners (who are the greatest users of the system) should pay the charge, but receive an offsetting pension rise as occurred when the $2.50 pharmaceutical charge was introduced a few years ago. This would ensure that they are not financially worse off, but merely more conscious of the cost of over-frequent doctor visits. The States should also be able to impose such a charge on their hospital outpatients. The abandonment of the co-payment was estimated to cost $700 million p.a. within two years. As that proposal had a $3.50 charge and a $300 p.a. safety net, this proposal at $5 and $250 respectively should save over $1,000 million.
HOSPITALS
With the States' finances under strain they are under pressure to improve the efficiency of public hospitals. In some States there is scope for significant savings. At the same time the Federal government as part of its new Medicare agreement is trying to coerce more people into public hospitals by linking funding to the States for the cost of running public hospitals to increases in public hospital patients, but without meeting the full cost of such patients. However, with the right incentive there is scope to increase the utilisation of private hospitals and ease the pressure on States' budgets. Encouragement of greater private health insurance would have the twofold benefit of increasing utilisation of under-utilised private hospitals and increasing revenue into the public ones. A limited tax concession, or perhaps relief from the Medicare Levy for those who pay for private cover, could be used as an incentive. Either way, a proposal which was revenue neutral to the Commonwealth could be found, offering financial benefits to private insurers.
As part of the efforts to prop up the Medicare system and address the long waiting-lists which inevitably result from the provision of free services, the Government has introduced a number of measures designed to increase public patients numbers. These "bonuses" send exactly the wrong signals from the taxpayer's perspective. The Contingency Allocation for Public Hospital Access Pool and Waiting Lists Management programs which form the basis of this proposal should be abolished, saving $220 million.
PHARMACEUTICAL SERVICES AND BENEFITS
Further reform of this major item in health care costs is now needed. The estimated cost in 1992-93 is $1520 million, up 7.5 per cent on 1991-92. There is no reason why prescriptions to the public should be subsidised except to genuinely needy people, who because of very costly medical treatments or lack of financial resources cannot afford to pay for them (including the chronically ill). Abolition of the general subsidy would save $234 million in 1992-93. This still leaves those entitled to the concessional payment, which at over $1 billion is the biggest component of pharmaceutical costs.
HEALTH PROMOTION PROGRAMS
Many of these programs are lifestyle programs designed to encourage better health or safer sex or drug practices. There is, however, a strong case for scaling back those that are just advertising campaigns, as distinct from providing medical or related services. These include the National Community Health Program, National Health Advancement Program, Public Health Program, National Women's Health Program (excluding cancer screening), AIDS and National Drug Strategy. The combined savings from these programs would be $80 million.
Summary
| $m | |
| Medical Services | 1000 |
| Hospitals | 220 |
| Pharmaceutical | 234 |
| Health Promotion | 80 |
| Total | 1534 |
EDUCATION
Responsibility for funding education should mainly rest with the States. Except perhaps for student assistance, the Federal Government should not directly be involved in funding primary, secondary or tertiary education. Yet the Commonwealth currently spends $9.2 billion (up $800 million or 10.1 percent on the previous year), including $1.8 billion on Austudy/Abstudy.
STUDENT ASSISTANCE
The explosive growth in student assistance (Austudy/Abstudy) -- nearly 40 per cent ($500 million) in 3 years -- clearly requires remedial action. The Government's recent decision gradually to lower from 25 to 22 the age of "independence" from the family for Austudy will only add to the problem and will cost $40 million p.a. within 4 years. ("Independence" enables students to receive higher payments). This proposal should be reversed and greater emphasis should be placed on assessing "independence", which is already abused. Total savings combined should be at least $60 million. Austudy abuse is widely recognised and the House of Representatives Standing Committee found in 1991 that 12 to 27 per cent of students were receiving more than they were entitled to. Further tightening in this area should save another $40 million p.a.
YOUTH BUREAU
The remnants of the failed Priority One youth programme -- its Youth Bureau and grants -- should also be scrapped, saving an additional $4 million.
FEDERAL OVERSIGHT
The Good Schools Program, Teachers' salary benchmark -- Commonwealth contribution, National Project on the Quality of Teaching and the Students at Risk programme, are classic examples of Canberra's unnecessary intervention in the States' education systems. Their abolition would save $30 million.
The recently introduced Quality Assurance in Higher Education programme was another attempt to centralise education and "standards" in the enormous Department of Education, Employment and Training empire. Its demise would save the taxpayer $88 million.
POST SECONDARY
Freeing up higher education, by transferring it to the States and liberalising restrictive tied-funding arrangements, would allow universities to pursue more innovative and flexible finance arrangements. This would have the dual effect of allowing them to charge fees for students who just miss out (as for foreign students) and to vary the cost of courses -- including top-up fees. Universities could also more actively involve business and benevolent funds. Similar arrangements should be made for TAFE. This would allow TAFE colleges to obtain the enormous growth in funds (an extra $1 billion) which they require. Introducing this flexibility and transferring responsibility to the States (with adequate offsetting revenue access) should allow funding growth to be pegged back, saving $250 million p.a. in higher education within two years and almost $100 million p.a. in TAFE.
Summary
| $m | |
| Student Assistance | 100 |
| Youth Bureau | 4 |
| Federal Oversight | 118 |
| Post Secondary | 350 |
| Total | 572 |
HOUSING AND COMMUNITY AMENITIES
COMMONWEALTH/STATE HOUSING AGREEMENT (C.S.H.A.)
Housing is another function with which the Federal Government need not be involved. Current expenditure ($960 million) is made through the States in accordance with the Commonwealth/State Housing Agreement. The funding of construction of public housing is anachronistic. For the State public housing authorities to be building more homes and acquiring more land for in many cases virtual lifetime tenancies is highly inflexible, costly and outmoded. There is an immediate need to shift public housing assistance from capital funds to recurrent funding.
This would involve an end to large-scale public housing construction (except in remote areas) and property acquisitions -- the Housing Commissions already own almost $20 billion of housing stock. The money would instead be used for mortgage and rent relief with greater emphasis placed on meeting short-term support, and management fees for private developments. The "home for life" concept of public housing, which results in long queues, would be ended.
The Commonwealth should withdraw entirely from housing, leaving it to the States, and hand over funding equivalent to approximately half the current agreement. If this was then used for recurrent funding, and the States also gradually sold down their public housing stock, they could provide rental assistance to more families in need and reduce their own Budget outlays on this function. Saving: $480 million.
OTHER
With the transfer of the housing responsibilities to the States a number of smaller programs could also be terminated. The abolition of the National Urban Development Program, the National Housing Strategy and costs associated with the Better Cities programme and the Local Government Development Program could save $17 million.
Summary
| $m | |
| CSHA | 480 |
| Other | 17 |
| Total | 497 |
DEFENCE
There has been much debate overseas about the defence needs of nations in the "new world order". From Australia's point of view, while we have never had a very large or expensive defence force, we clearly need to maintain a strong defence capability. However, this does not mean that there is no scope for savings.
COMMERCIALISATION
The Wrigley Report identified savings of up to $350 million p.a. from greater commercialisation of the forces. The Government has accepted many of the recommendations but the speed of their implementation is very slow. The extent of commercialisation could also be expanded to cover all non-high security areas. If this process was hastened and broadened it could bring forward (including additions) savings of $250 million within the next couple of years.
DIARCHY
The diarchy -- the running of two administrations -- is a big "burden" on the Defence Budget. This results from the development of an armed forces central headquarters and a Departmental one. There are 15,000 combat personnel, compared with 50,000 service personnel in support roles and half that again in civilian roles. There should be scope to reduce this bureaucracy and reduce the diarchy. Such a move could save $100 million p.a. in the first instance, although redundancies would have to be absorbed in earlier years.
Summary
| $m | |
| Commercialisation | 250 |
| Diarchy | 100 |
| Total | 350 |
CULTURE AND RECREATION
BROADCASTING
The Australian Broadcasting Corporation (ABC) receives over $600 million of taxpayers funds ($500 million directly from the Budget plus $100 million from the Department of Transport and Communications), while the Special Broadcasting Services operates on $62 million and with lower average salaries. (10) ABC staffing in 1992-93 is estimated at nearly 5,500, about the same as staffing allocated to all foreign affairs and trade activities, over 5 times bigger than the staff of Austrade, and over eight times the staff of SBS. With the growing range of commercial television and broadcasting, there is a good case to reduce markedly the role of the ABC, which runs an excessive management structure (senior management has almost doubled in three years) and is excessively indulgent in world travel. The major television and radio networks have had to face cuts of up to 30 per cent in recent years while the ABC has had its funding only slightly reduced in real terns since 1989-90. A 20 per cent cut to the ABC's direct budget funding would save $100 million. This saving could be phased in over a couple of years and the ABC could be given greater commercial freedom in pay TV and external financial support. The SBS has proven remarkably efficient compared to the ABC. However, this should not make it immune from cuts. A cut of 10 per cent, or $6 million, would be an appropriate first step to reducing the SBS's reliance on taxpayer support.
The new Australian Broadcasting Authority costs $10 million to run, which is quite excessive when compared to the former Australian Broadcasting Tribunal's high $3 million budget. The ABA's budget should be pruned to no more than $2 million, saving $8 million, while the $2 million of grants to the Public Broadcasting Foundation should be ended.
NATIONAL COLLECTIONS
These include the Commonwealth national galleries, museums, libraries, archives and the Australian War Memorial. The total cost of the taxpayer subsidy to these Canberra tourist attractions is $120 million. Over time, these bodies should be able to raise an increasing proportion of capital costs from public bequests, donations or corporate sponsorships, while operating costs should largely be met by user charges. A 25 per cent decrease in funding for these bodies should be implemented, saving $30 million p.a. by the third year.
FILM INDUSTRY
The Federal Government has provided extensive financial support to the film industry and the 1992-93 Budget provides $85 million for this purpose. Australian film makers are clearly now capable of producing good and saleable films and the time has come to wean the infant off the taxpayer teat. The Government renewed this funding commitment in the last Budget at an average cost of $60 million per annum. This funding should cease with effect from 1994-95.
ARTS AND HERITAGE
The dominant item of funding within this area is the Australia Council, which has been widely criticised for favoured patronage and personal prejudices. It dispenses about $48 million of grants and consumes $8 million to undertake this. As with film, Australian artists and writers have now demonstrated that they are well able to compete internationally and many make reasonable livings from their professions. The abolition of the Australia Council would save $56 million, and would allow a phasing down of financial support to arts activities generally, including the Opera, Ballet and NIDA. Not going ahead with Mr Keating's arts election promises would save an extra $20 million p.a. Total: $50 million.
SPORT AND RECREATION
This item includes the Australian Institute of Sport -- for training elite athletes -- the highly politicised Community, Cultural, Recreation and Sporting Facilities Program, and the Sport Drug Agency. The Institute of Sport and Drug Agency should be made independent and self sufficient by way of private contributions from athletes, sponsors and donors. The Facilities Program is localised pork-barrelling at its worst and should immediately cease. There is no need for Australia to have State and Federal Sports Ministers, which are just an excuse to throw money and patronage around in an endeavour to buy votes. The Commonwealth should vacate this arena. Combined savings: $77 million.
ENVIRONMENT
The creation of a Federal Environment Protection Authority was another case of duplication with the States, which already have similar bodies. Whatever the case for environmental regulation to be on a national basis (and that is far from clear), a Federal body should not proceed unless the States agree to abandon the field. It should be abolished before it gets properly established and starts further discouraging investment. Saving: $11 million.
Climate change grants and policy units should also be disbanded, saving $11 million. Cuts could also be made to the rapidly expanding "ecologically sustainable development" resource programme. Simply retaining this later programme at 1991-92 levels would save $12 million. Many of these functions are also performed (and would continue to be) in the Department of Primary Industry and Energy.
The National Parks and Wildlife Service is subsidised to the tune of $55 million. As many of the parks for which it is responsible are popular tourist attractions it would not be unreasonable to increase (introduce in some cases) user charges for entry and use. Savings of $11 million (20 per cent) should be feasible.
Summary
| $m | |
| Broadcasting | 116 |
| National Collections | 30 |
| Film | 60 |
| Arts | 50 |
| Sport | 77 |
| Environment | 45 |
| Total | 378 |
TRANSPORT AND COMMUNICATIONS
URBAN PUBLIC TRANSPORT
The Urban Public Transport programme provides funds to the States to prop up ailing and inefficient public transport systems, many of whose loss-making activities should be privatised or closed down. This is another example of unnecessary duplication. The programme costs $72 million, which should be saved.
RAILWAYS
The Australian National Railways Commission continues to receive a $59 million subsidy to run unprofitable routes mainly in South Australia and Tasmania. If it cannot make them profitable then alternative transport should be found for these areas and the rail service terminated. The subsidy should initially be halved (to $29 million) then cease altogether. Saving: $30 million.
SHIPPING
The Tasmanian Freight Equalisation Scheme is an ongoing subsidy to shipping costs between Tasmania and the mainland. There can be no continuing justification for this impost. Saving: $34 million.
AVIATION
The Civil Aviation Authority should immediately move to full cost recovery. The Government had initially proposed this but has subsequently delayed it. It will save $24 million in 1993-94.
Summary
| $m | |
| Urban Public Transport | 72 |
| Railways | 30 |
| Shipping | 34 |
| Aviation | 24 |
| Total | 160 |
INDUSTRY ASSISTANCE AND DEVELOPMENT
The growing emphasis on the importance of adopting international best practice in industry, and the continued phasing-down of tariffs and increasing reliance on the exchange rate as a natural protector, suggests that there should be a phasing-down of programs in this area.
INDUSTRY PROGRAMS
The industry area is full of small, targeted special assistance schemes and bodies most of which are difficult to justify. The Australian Manufacturing Council and the Automotive Industry Authority should be abolished saving $4 million.
Particularly now that an export "culture" appears to have become established in manufacturing industry, the special assistance programs for various sectors (from Information Technology to Agri Food Industry to Shipbuilding to Printing to Pharmaceutical) should either be terminated completely, or at least cut back. Current outlays are over $300 million. Savings of 30 percent, $100 million, should be achievable within a short space of time. The National Industry Extension Service should be handed entirely to the States, saving $5 million.
TOURISM
A greater private sector contribution for the Australian Tourist Commission would be justified to ensure the budget is being effectively targeted by those who stand to gain from the expensive promotions. A 50/50 funding basis -- as opposed to the current 80(public)/ 20(private) -- would save the taxpayer $30 million. The new Department of Tourism should be wound up, saving a further $6 million.
ASSISTANCE TO EXPORTERS
The two major forms of support in this area are from Austrade promotions and the Export Market Development Grants Scheme (EMDGS). These two programs cost $120 million and $180 million respectively. Austrade under its new management has been going through a major process of improvement in recent years after a damning McKinsey report on its activities. There is still room for greater cost recovery in particular, and for cost savings with the Department of Trade and business organisations. Savings of $30 million should be possible from active pursuit of these ends. The EMDGS has recently had its guidelines broadened to allow continued access in particular after 8 years. These grants should be better targeted to helping firms crack into their early export markets. They should not be an ongoing form of assistance or subsidy. This stricter criterion would be more appropriate for the scheme and save about $20 million.
Summary
| $m | |
| Industry Programs | 109 |
| Tourism | 36 |
| Exporters | 50 |
| Total | 195 |
LABOUR AND EMPLOYMENT
As indicated, the increase in unemployment during the 1980s importantly reflects the increase in the proportion of the working population seeking work. One factor in that increase is the greatly increased spending on programmes of various kinds designed to help people find employment. While, therefore, the reasons for the increased unemployment are complex, the evident failure of these programs suggests that the solution to the problem may largely lie elsewhere, particularly in reforming the labour market.
LABOUR MARKET ASSISTANCE
While Australia has high structural (as well as cyclical) unemployment, there is a need to help retrain some people or they will not be able to regain employment. Unfortunately, most of the government-sponsored labour market programs have comparatively poor records with respect to improving employment prospects and there is a substantial element of shuffling the unemployment pack. For instance, the largest programme, Jobtrain, has a success rate of only 20 per cent. For an outlay of over $200 million this is poor. This programme was also highly criticised by the Auditor-General for its inability to provide the appropriate skills to assist job seekers find employment. This programme should be halved, saving $114 million, and if its success rate does not improve it should be dropped altogether.
Another programme of limited value is the Jobstart programme, which basically provides a subsidy to an employer because the cost of the employee's labour is too high. This situation has arisen because of the lack of flexibility in labour relations. It is an absurdity for other workers who are being paid what they are worth to have to pay taxes so a privileged group of fellow workers can be paid the same wages, even though by definition the employer (and the Government) considers them to be worth less. In the face of acceptance by the Prime Minister of the need for enterprise-based employment relations, this problem of award inflexibility should be addressed, therefore making wage subsidies unnecessary. Total savings: $160 million.
The Australian Youth Initiative Grants should cease. Young people should not need a government hand out to show initiative. Saving: $6 million.
The New Enterprise Incentive Scheme is another programme which, according to the Budget Papers, "provides income support and training to assist unemployed people set up small business ventures". However, with small business bankruptcies running at 17,000 per annum, this poses obvious difficulties for the unemployed. The scheme costs over $11,000 per participant. As banks and other lending institutions are now liberalising their lending practices (with $140 million from the Reserve Bank to help), genuine business possibilities should be able to receive backing from that quarter. The abolition of this programme will save $31 million.
INDUSTRIAL RELATIONS
With the increasing move towards enterprise bargaining, the justification for a large corporatist based industrial relations department and related activities is rapidly disappearing. Industrial relations agencies are still projected to employ 1700-1800 persons and are still expected to consume $260 million annually for the next few years. With the exception of the cost of the Industrial Relations Commission -- which should be declining in future years, but isn't, and the Special Industry Services (which are fully funded by levies) -- the rest of the expenditure could be abolished.
This would result in an end to workplace reform payments (which are another form of grant to trade unions), the closure or sale of the Trade Union Training Authority (annual cost $10 million), a major reduction in advisory services and abolition of the Affirmative Action Agency and the Construction Industry Development Agency. Total savings: $90 million.
The National Occupational Health and Safety Commission should have its responsibilities handed back to the States' respective bodies, thus saving an extra $20 million.
EMPLOYMENT SERVICES
The Commonwealth Employment Service (CES) is one of the larger and more expensive government agencies. It is estimated to cost $446 million in 1992-93 (an 18 per cent increase over the previous year) and involve 8,800 staff years. With the recession, and its new responsibility for NEWSTART, its size has increased dramatically. The CES is not viewed very positively by employers -- hence the multimillion dollar advertising campaign to try to remedy this -- nor by clients -- who are cynical of success through this body. The decision to move NEWSTART to CES from DSS was also a mistake, and a costly one at that. DSS is relatively efficient at processing and dealing with welfare issues; by comparison CES is not. The CES and DSS should be merged into one larger body which can administer welfare payments and related activities. The CES's job placement function should be contracted out to private sector employment agencies. They could be put up to tender with a success fee. Such a proposal has been supported by DSS, who claim major savings can be made. It has naturally been resisted by DEET (the department responsible for the CES). Savings arising would be at least $150 million.
IMMIGRATION
The Department of Immigration appears to be overloaded trying to deal with boat people, Chinese students and numerous changes in procedures, regulations and court appeals. The recent decision to call in the Federal Police to investigate institutionalised bias in decisions reveals great strain. While savings from staff reduction would seem out of the question, there is scope to increase cost recovery for migration to a full cost basis for all non-refugee or humanitarian cases. This would increase cost recovery by $20 million. Action should also be taken to reduce the generous procedural machinery available to appellants against bureaucratic decisions.
Summary
| $m | |
| Labour Market Programs | 311 |
| Industrial Relations | 110 |
| Employment Services | 150 |
| Immigration | 20 |
| Total | 591 |
PRIME MINISTER
The Department of Prime Minister and Cabinet has been the dumping place for a whole heap of minority interests and past pet projects. It needs a good clean-out, which could begin with the abolition of a number of quangos. The Office of the Status of Women ($4m), the Office of Multicultural Affairs ($5m), Council for Reconciliation ($5m), Resource Assessment Commission ($8m), and the Australian Science and Technology Council ($4m) should all be axed and the functions returned to relevant departments, providing a combined saving of $26 million.
The Public Service Commission, which has grown from $9 million in 1989-90 to $23 million in 1990-91, should be cut back to no more than $5 million, saving $18 million.
Summary
| $m | |
| Quangoes | 26 |
| Public Service Commission | 18 |
| Total | 44 |
ABORIGINAL AND TORRES STRAIT ISLANDER AFFAIRS
There is no evidence that the billions of dollars expended on Aboriginal programs over the past two decades has made a worthwhile contribution to reducing the economic, social and health problems which are experienced by many (but not all) Aborigines. While there may have been improvements in a few specific areas (such as a decline in infant mortality), the overall situation may even have deteriorated. This suggests the need for a fundamental review based not on the false and dangerous stereotyping that people are disadvantaged simply by being Aboriginal, but on targeting people who are actually disadvantaged. Programs should also be designed to integrate Aborigines within main-stream Australian life, rather than encouraging them to see themselves as separate from other Australians. A classic example is the allocation of more than $1 million over five years to create a Tasmanian Aboriginal language.
A.T.S.I.C.
The Aboriginal and Torres Strait Islander Commission (ATSIC) is the main Aboriginal programmes funding body. It replaced the Department of Aboriginal Affairs and subsumed most of its functions. It has increased its budget from $600 million in 1990-91 to an estimated $932 million in 1993-94, including a 24 per cent increase this financial year. While many of the programs undertaken by ATSIC may be beneficial, its consumption of funds is extraordinary, particularly as it does not even include Abstudy. A cap must be placed on its expenditure which has been widely criticised as wasteful, misdirected or simply ineffective. It clearly needs to be better targeted at overcoming real problems confronting Aboriginal people. An administration which uses over 10 per cent of the resources does not assist. ATSIC funding should be pegged at 1992-93 year levels, which would save $100 million in 1993-94 and an additional $60 million the next year. Within this budget ATSIC could continue to determine its own expenditure priorities but stricter accountability and auditing should be implemented.
ABSTUDY
Abstudy is the Aboriginal version of Austudy. It is a racially discriminatory student assistance scheme in that it denies non-Aboriginals access to its benefits. It is also discriminatory in terms of tests for eligibility; i.e., it's easier to qualify -- there is no assets (or Aboriginality) test for instance -- and it is financially more generous, by providing additional assistance for school fees. In times when all Australians wish to remove bastions of discrimination, either in race or sex or age, there can be no case for maintaining a racially based student assistance scheme. Aboriginal Australian students should be eligible for the same assistance as other Australian students. Abstudy should be merged into Austudy with Austudy guidelines being applicable. Such a move would save in the order of $30 million.
ROYAL COMMISSION RESPONSE
The Government's main response to the findings of the Royal Commission into the Deaths of Aboriginals in Custody has been to provide more funding instead of re-orienting Aboriginal programmes. This "response" is scheduled to cost an additional $130 million next year, on top of the already $1 billion plus spent on Aboriginal people. A much closer review of these spending priorities is needed in conjunction with the proposed cuts in ATSIC itself. This money should be limited to predominantly health funds at half the current projections. Saving: $50 million.
Summary
| $m | |
| ATSIC | 100 |
| Abstudy | 30 |
| Royal Commission | 50 |
| Total | 180 |
OTHER ECONOMIC SERVICES
The functions of the Prices Surveillance Authority and the Federal Bureau of Consumer Affairs can be undertaken elsewhere. The former's role is duplicated by both the new competition function of the Trade Practices Commission (now in Treasury) and the Industry Commission. The Federal Bureau of Consumer Affairs is another duplicating body -- this time with the States -- which provides grants to special interest groups. Their abolition would save $5 million.
Summary
| $m | |
| Total | 5 |
LEGISLATIVE SERVICES
This item is the servicing of Parliament. It includes salaries and support for Members and Senators, Presiding Officers, Hansard and Parliament House itself. The largest component of this $300 million item is the Department of Administrative Services parliamentary and ministerial services branch at a cost of around $140 million. This works out at over $600,000 per MP -- and that does not include their salaries (starting at around $67,000 for back-benchers) which are paid out of separate Budget items. A 10 per cent cut across the board on these expenses would save $30 million and the MPs should still be able to cope adequately. The first item for saving could be the termination of the lifetime Gold Pass.
Summary
| $m | |
| Total | 30 |
LAW, ORDER AND PUBLIC SAFETY
The Law Reform Commission, Human Rights and Equal Opportunity Commission (HREOC), Australian Institute of Criminology, National Crime Authority, the Australian Transaction Reports and Analysis Centre (ATRAC, formerly the Cash Transactions Reports Agency) should all be abolished and their functions passed back to appropriate departments or authorities. The HREOC and the Law Reform Commission do not add anything to the Australian legal system -- if anything they tend to undermine it. The National Crime Authority was set up to catch big-time criminals who fell through the net. It duplicates functions of the Australian Federal Police, Australian Securities Commission and State bodies. It proved to be very unsuccessful in the 1980s and its demise would not be noticed. The Institute of Criminology performs work done by police forces, the Australian Bureau of Statistics and universities. Any residual function it has could be adequately handled by those bodies. The ATRAC has already undergone a name change but what was really needed was extermination. This body is a very costly and burdensome imposition on banks, customs authorities and individuals undertaking normal ordinary business. It has, like some of these other bodies, failed to live up to its supposed role -- identifying crooks. The combined savings from killing off these quangos would be $71 million.
Summary
| $m | |
| Total | 71 |
FOREIGN AFFAIRS AND OVERSEAS AID
Australia has a total foreign aid budget of almost $1400 million, plus another $600 million on foreign affairs (non-aid) related expenditure. With continued conflicts in former Yugoslavia and Cambodia there will be pressure for more funding. However, Australia has a major budgetary problem which needs to be addressed. There is a bottomless barrel of worthy overseas aid projects and more attention is needed to prioritising the use of aid resources and to recognising that the best contribution Australia can make in assisting the world's developing nations is by allowing them freedom to trade with US.
Some $390 million in 1993-94 is earmarked for multilateral organisations (including the United Nations, the Commonwealth, the World Bank, the Asian Development Bank and the European Bank for Reconstruction and Development). These bodies have high levels of expenditure on their staff and headquarters. For example, recent reports indicate that the European Bank for Reconstruction and Development spent more money ($425 million) on its head office in its first 20 months than it spent on providing loans and investments in Eastern Europe, are particularly notable. Australia's contribution to the Bank last year was over $7 million. Australia should cut its expenditure in this area initially by 20 per cent and perhaps further if things do not improve. Savings: $78 million.
Further savings can be made by reducing our contributions to international organisations, like UNESCO and the World Health Organisation, which either have a history of not using resources efficiently or whose need seems to have diminished. Outlays in this area are $60 million. At least a $10 million saving would be easily attained upon review.
General Administration soaks up a further $450 million. A 10 per cent saving in this area should be achievable by reorganising our overseas posts with greater attention to priorities now, as opposed to 30 years ago. There is questionable justification for maintaining 8 posts in the USA, 3 in Paris, 4 in Switzerland and 3 in Germany and the largest single post in London, when our opportunities are developing in Asia, South America and Eastern Europe. Particular attention should also be paid to reducing the AIDAB local administration -- perhaps one third of the total $45 million savings.
This leaves the largest part of the budget, which is bilateral aid. Papua New Guinea receives $249 million, which, although reduced from $270 million two years earlier, still seems excessive. Areas of emergency aid, refugee relief and non-government organisations should be left untouched. One major item which should be cut sharply, or preferably abandoned, is the Development Import Finance Facility (DIFF). This is a poor form of industry assistance which is paid to a few very large Australian companies who should not need taxpayer handouts to export their products and expertise. It should be phased out expeditiously, saving over $100 million. Further prioritising of expenditure and some reduction in PNG aid would provide total savings under this heading of $150 million (including DIFF).
Summary
| $m | |
| Multilateral aid | 78 |
| Organisations | 10 |
| Administration | 45 |
| Bilateral aid | 150 |
| Total | 5 |
GENERAL AND SCIENTIFIC RESEARCH, NEC
C.S.I.R.O.
The Commonwealth Scientific and Industrial Research Organisation (CSIRO) makes an outstanding contribution to Australia's technological knowledge and advancement. That contribution has increasingly been recognised by private sector funding for projects. This direction should be further pursued. Raising external funding by 10 per cent (from the current 30 per cent to 40 per cent) would save $40 million.
AUSTRALIAN RESEARCH COUNCIL
The Australian Research Council (ARC) is the biggest grants body the Commonwealth has at its disposal. In 1993-94 it will hand out $293 million. Real funding to the ARC has grown by 238 per cent in 10 years. While most of the grants provided are for worthwhile activities, some are politically inspired, e.g., greenhouse issues, and do not reflect a balanced national interest. The body is also far too centralised and has removed much of the universities' independence in this important area. A closer review, tighter guidelines, and more decentralised decisions should be able better to direct this funding at a lower cost. Saving: $40 million.
CO-OPERATIVE RESEARCH CENTRES
The Government seems to have gone overboard with its support for the new Co-operative Research Centres programme. There were initially going to be 50 such centres (a lot for an untried programme) over three selection stages, which are almost complete. Then, in his "Investing in the Nation" statement, Prime Minister Keating announced another 10 would be added. The total cost of these additional ones will be $25 million within two years. The original 50 should proceed but these extra 10 should not, pending assessment of the success or otherwise of the first 50. Saving: $25 million from Forward Estimates.
Summary
| $m | |
| CSIRO | 40 |
| ARC | 40 |
| CRCs | 25 |
| Total | 105 |
ADMINISTRATIVE SERVICES
OFFICE CONSTRUCTIONS
The first item on which to save money in this area is the ridiculous programme decision to taxpayer-fund the construction of more office buildings. When all Australia's capital cities (even including Canberra) have excess office space it is nonsensical to start building more. These constructions should be terminated immediately, if practicable. This would save $148 million in 1993-94.
EFFICIENCY DIVIDEND
Departments are currently subject to a 1.25 per cent efficiency dividend to try to induce productivity improvements and reduce their running costs. This charge has had limited effect as the Government regularly exempts bodies altogether -- like the ABC -- or it rearranges them and assigns additional resources. The average annual increase in running costs over the last 3 years has been 5.4 per cent real, reflecting the strong growth in public service employment. Also, the conclusion of an "enterprise bargaining" agreement with 150,000 Federal public servants in November 1992 provided for a 5 percent wage increase largely in anticipation of "productivity" offsets and appeared to have a considerable window-dressing component. There should be a renewed drive to reduce running costs in the departments and agencies, by introducing a special additional 2.5 per cent efficiency dividend for next year. This would be on top of the existing 1.25 per cent and apply to all programmes not already subject to cuts outlined elsewhere. This measure would save about $230 million.
COMMERCIALISATION
The Department of Administrative Services (DAS) runs a number of Common Business Services which provide services on a more-or-less commercial basis to predominantly government departments. While these services have become more competitive in recent years, there still appears to be scope for further commercialisation and eventual privatisation of them. Sale of them even to employees would have the dual benefit of improving management and resource flexibility while also removing a large number of public employees from the public superannuation scheme. However, such services should be opened to public tender. These bodies include: Comcar, Fleet, Australian Property Group, Project Services and Interiors, Asset Services, Overseas Property, Australian Government Publishing Service, DAS Removals and Distribution, Australian Valuation Office, Australian Government Analytical Laboratories, Australian Protective Services, and the Australian Survey and Land Information Group. While it is difficult to obtain accurate information on their various profitability levels, there is undoubtedly room for further improvement. With gross income of $875 million, a 10 per cent profit improvement would save $87 million.
NATIONAL MEDIA LIAISON SERVICE
The National Media Liaison Service costs $2 million. It is little more than a Government propaganda unit which the taxpayer should not fund.
COMMONWEALTH SUPERANNUATION
Public servants' superannuation entitlements are relatively generous, with indexed pensions for most. Particularly given the move towards employing public servants on a contractual basis similar to that for private sector employees, and the increased politicisation of public services, the case for more generous superannuation than in the private sector is diminished. The cost of retired public servants benefits is estimated to be $1,278 million in 1993-94. This figure is rising sharply and will be $1,735 million by 1995-96 (two years away). The Commonwealth needs to take action to reduce the future liability on working Australians. The new superannuation scheme introduced in 1990 -- with a lump sum payment -- is estimated to eventually save $800 million. But moves should be made now to reduce the superannuation entitlements of future public servants to the legislated minimum SGC requirement, as the New South Wales Government has done. This could save hundreds of millions of dollars in future years.
Summary
| $m | |
| Office Constructions | 148 |
| Efficiency Dividend | 230 |
| Commercialisation | 87 |
| NMLS | 2 |
| Commonwealth Superannuation | - |
| Total | 467 |
ASSISTANCE TO OTHER GOVERNMENTS
STATES
The parlous state of Victoria's, South Australia's and Tasmania's finances, in particular, makes it difficult to cut general revenue grants to the States in the immediate future. In any event, 1993-94 is the final year of the three-year arrangement providing for a real terms guarantee and it would seem appropriate to maintain that arrangement for that year. But it should be strictly maintained and no "special" additional assistance should be provided, as was the case in 1992-93. Beyond 1993-94, the general revenue grants should be provided on a basis which puts pressure on the States to implement productivity-improving measures in the delivery of their services. A "formula" for determining such grants on that basis needs to be worked out in co-operation with the States.
LOCAL GOVERNMENT
The Commonwealth should get out of this area of funding altogether. Despite repeated attempts (the last one in 1988) to have local government recognised in the Constitution, the Australian electorate has been astute enough to realise that, with a good deal of wasteful expenditure being undertaken to operate an excessive number of councils, the greatest need is for reform (even abolition) rather than specific constitutional recognition. The responsibility for funding local government should entirely be borne by its creators -- the States. Commensurate funding equal to 80 per cent (so they are forced to downsize) of its current level (excluding identified road grants) should be provided to the States in additional general revenue grants. Saving $153 million in 1993-94.
BETTER CITIES
The Building Better Cities programme is completely inappropriate in this economic climate. It was designed to improve urban infrastructure -- an area of State responsibility. $200 million is the estimated outlay for 1993-94. Half of this should be saved and the remainder paid out to complete worthwhile projects. Saving: $100 million.
Summary
| $m | |
| States | - |
| Local Government | 153 |
| Better Cities | 100 |
| Total | 253 |
PUBLIC DEBT INTEREST
All the savings outlined above will have the positive effect of reducing the Commonwealth's public borrowing requirement and hence its subsequent debt interest costs. While such costs have come down sharply as interest rates have fallen, that process is now reversing as borrowing increases. The public debt interest cost from Commonwealth borrowing was forecast in the last Budget to rise from $3.9 billion in 1991-92 to $5.0 billion in the current year and to reach a whopping $8.0 billion by 1994-95. This calculation was prior to taking account of election promises -- costing approximately $1,300 million in 1993-94.
The interest saving from this savings package of $8 billion would be of the order of $500 million within three years.
PRIVATISATION
Privatisation is a crucial part of any genuine micro-economic reform. Organisations like Telecom, the Federal Airport Corporation (FAC), the Commonwealth Bank, etc., need the commercial freedom to operate in their respective competitive markets. These bodies should be added to the Government's existing privatisation list, which includes:-
- 19 per cent of Commonwealth Bank ($1000m)
- 100 per cent of Qantas/Australian ($2000m approx.)
- Australian National Line
- Housing Loans Insurance Corporation ($110m)
- Uranium Stockpile
- Commonwealth interests in the War Service Land Settlement Scheme
The process of privatisation should be speeded up, and the organisations themselves should play a more active role in their final financial structure. Employee share ownership should also be high on the agenda for the sale of these bodies. The non-committed part of the Commonwealth Bank (50 per cent) -- the Prime Minister has already announced the sale of an additional 19 per cent -- would be worth close to $3 billion. While the value of Telecom was hotly debated during the recent election campaign, it would conservatively be worth $15 billion. The FAC may need to be broken up before sale -- to ensure competition -- but its various airports should be worth upwards of $500 million. These assets should not be rushed onto the market, but a professional sale timetable should accommodate the remainder of the Commonwealth Bank, most of the FAC and either a third or half of Telecom within the next three years. The interest savings on government debt from such a sell-off would be of the order of $600 million per year by the end of the third year.
CONCLUSION
The savings outlined in this document provide tangible examples of the (large) expenditure reductions which are available to the Government as a means of eliminating the structural Commonwealth Budget deficit. There is also scope to obtain significant additional proceeds from privatisation beyond the asset sales already foreshadowed.
Nearly all of the savings could be achieved within a year or two. Some longer term ones, like sole parent pensions, would take a little longer, but nevertheless should be introduced now.
Savings of the magnitude indicated here would provide a boost to national savings and assist Australia's economic recovery.
Table 1: Commonwealth General Government Outlays
| GDP (1) | Own Purpose Outlays | Assistance to States | Total Outlays | ||||
| $M | $M | %GDP | $M | %GDP | $M | %GDP | |
| 1982-83 | 171,849 | 29,888 | 17.4 | 16,507 | 9.6 | 49.501 | 28.8 |
| 1983-84 | 194,883 | 35,305 | 18.1 | 18,962 | 9.7 | 57,365 | 29.4 |
| 1984-85 | 216,257 | 40,775 | 18.9 | 20,638 | 9.5 | 64,876 | 30.0 |
| 1985-86 | 240,224 | 45,580 | 19.0 | 21,994 | 9.2 | 71,011 | 29.6 |
| 1986-87 | 264,488 | 49,820 | 18.8 | 23,273 | 8.8 | 76,405 | 28.9 |
| 1987-88 | 298,266 | 51,923 | 17.4 | 23,871 | 8.0 | 79,427 | 26.6 |
| 1988-89 | 339,582 | 54,966 | 16.2 | 24,173 | 7.1 | 82,750 | 24.4 |
| 1989-90 | 369,897 | 58,863 | 15.9 | 26,045 | 7.0 | 88,100 | 23.8 |
| 1990-91 | 379,262 | 66,007 | 17.4 | 26,694 | 7.0 | 96,691 | 25.5 |
| 1991-92 | 386,283 | 72,769 | 18.8 | 26,804 | 6.9 | 103,505 | 26.8 |
| 1992-93 Budget Revised | 409,073 405,210 | 78,356 78,900 | 19.2 19.5 | 29,542 29,300 | 7.2 7.2 | 110,688 111,300 | 27.1 27.5 |
Source: ABS 5501.0, 18 Nov 1992 for outlays from 1987-88 to 1992-93 (except 1992-93 Rev which are my estimates based on Mid Year Review revised Budget estimates). For outlays prior to 1987-88, data supplied by ABS. GDP (l) figures are from 5206.0, 18 March 1993 except for 1982-83 and 1983-84 figures which were supplied by ABS.
Notes:
(i) Commonwealth "General Government" outlays are slightly higher than "Budget" outlays as the latter do not include certain primarily off-Budget activities (such as the ABC).
(ii) The sum of own purpose outlays and assistance to the States does not add to the total because these items do not include Commonwealth payments to public trading enterprises or other interest payments in respect of loans raised on behalf of the States (for which the Commonwealth is fully reimbursed).
Table 2: Commonwealth Budget Outlays -- Government Estimates ($ billion)
| 1991-92 Outcome | 1992-93 Budget (1) | 1992-93 Rev. (2) | 1993-94 Rev. (2) | 1994-95 Rev. (2) | 1995-96 Rev. (2) | 1996-97 Rev. (2) | |
| Outlays (excl. Asset Sales) | 102.3 | 111.5 | 111.7 | 119.4 | n.a. | n.a. | n.a. |
| % Incr. (Real) | 4.9 | 5.9 | 6.5 | 3.6 | n.a. | n.a. | n.a. |
| % of GDP | 26.6 | 27.4 | 27.7 | 27.8 | n.a. | n.a. | n.a. |
| Asset Sales | 0.3 | -1.6 | -1.1 | -2.9 | n.a. | n.a. | n.a. |
| Total Outlays | 102.6 | 109.9 | 110.5 | 116.5 | 120.4 | 126.4 | 131.3 |
| % Inc. (Real) | 5.4 | 4.1 | 5.1 | 2.2 | 0.3 | 1.7 | 0.6 |
| % GDP | 26.7 | 27.0 | 27.4 | 27.2 | 26.2 | 25.7 | 24.9 |
(1) Budget time estimates. (2) Mid-Year Review (10 Feb 1993) incorporating "Investing In The Nation" initiatives and revised estimates of economic growth and inflation as follows: | |||||||
| Implied GDP (A) | 384.4 | 407.0 | 403.4 | 428.2 | 459.5 | 491.8 | 527.3 |
| Implied % Inc Nominal GDP | 5.9 | 4.9 | 6.1 | 7.3 | 7.0 | 7.2 | |
| Implied % Incr. Real GDP | 3.0 | 2.4 | 2.9 | 4.1 | 3.7 | 3.8 | |
| Implied % Non-Farm GDP Deflator | 2.8 | 2.4 | 3.1 | 3.0 | 3.2 | 3.3 | |
Note: These figures exclude the effect of some of the promises made in the election campaign, which are estimated to add $323m, $583m and $477m to outlays in 1993-94, 1994-95 and 1995-96 respectively.
ENDNOTES
1. See Reserve Bank Bulletin, April 1993, page 21. The "underlying" estimate excludes asset sales.
2. Of course, as the "underlying" PSBR was a surplus of about 1.4 per cent in 1988-89, the deterioration since then is over 7 percentage points of GDP.
3. Over the same period that Commonwealth outlays grew by 16 per cent real, the economy has grown by less than 2 per cent.
4. In the One Nation statement of February 1992, Prime Minister Keating said: "As I said at the outset, we have a plan for Australia -- a big plan. With our strategy, within four years the Federal Budget will return to surplus, and we will have created 800,000 jobs clipping 3 percentage points off unemployment".
5. That is, the reduction in the deficit from the present 4 per cent of GDP to 1 per cent of GDP in 1996-97 after allowing for the effect of personal income tax cuts, which would be equivalent to about 1.5 per cent of GDP in 1996-97. Of course, there is enormous difficulty in estimating the cyclical component in the deficit in the likely changed circumstances of continued high unemployment and low inflation in the 1990s. In particular, the growth in GDP implied by the Government's projections of outlays to 1996-97 suggests that the rate of unemployment -- hitherto the most important cyclical influence on outlays -- would be unlikely to fall significantly from present levels. This implication appears to be borne out by the Prime Minister's remarks on 21 April 1993 to the Institute of Directors, when he said that "It is an undeniable fact that unemployment is not going to fall dramatically in the next few years, and equally undeniable is the fact that long term unemployment will increase".
6. The Canadian Finance Minister put considerable emphasis on the fact that the deficit was being reduced by spending cuts and not by tax increases. "The right way to get the deficit down is by cutting spending. The right way to get revenues up is to encourage more economic growth, and you can't do that by raising taxes."
7. "General government" outlays differ slightly from budget outlays in that they include certain Commonwealth activities which are not fully reflected in the budget (such as the ABC).
8. When he was Treasurer, Mr Keating often criticised the 1982-83 budget of the Fraser Government as irresponsible. If Commonwealth own purpose outlays in 1992-93 were the same proportion GDP as in 1982-83, they would be about $8.4 billion lower. If Commonwealth assistance to the States was the same proportion of GDP as in 1982-83, it would be about $9.6 billion higher in 1992-93.
9. Renamed Job Search Allowance.
10. Estimated ABC average salaries in 1992-93 are $50,792 compared with $38,923 for SBS.
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