Debts and Deficits

CHAPTER 3

INTRODUCTION

The extent of State debt and of the budget deficit have, after decades of deliberate attempts to obscure their significance, become a focal point of public concern and public policy.  The public is now aware that the 1980s has left a legacy in the form of a large State debt;  and they know it will haunt them and their children for years.  They also recognise that the debt problem must be dealt with fairly, effectively and in an accountable manner;  and they want to know that it will never be allowed to happen again.

State governments can no longer think of themselves as fiscal islands.  Their fiscal performance does count -- locally and nationally -- as the sorry saga of Victoria in the 1980s and the early 1990s has shown.  More people than ever before are watching their State government carefully, and they are increasingly well-informed.  Even the media, after a long period of lack of interest and inadequate expertise, are now more competent and engaged in State fiscal matters on an on-going basis.  Competition among the States, which has always been a significant, though often disregarded, feature of the Australian federal system, is clearly increasing.  Workers and jobs, investors and capital, will increasingly vote with their feet;  the fiscal performance of State governments will have a major bearing on that voting pattern.

Commonwealth policies will continue to have a major impact on the States' fiscal position.  There is a chance that the nature and extent of Commonwealth control over State finances will lessen in the 1990s, but any such move is likely to be predicated not only on the States' getting their finances in good order but also on their showing a commitment to keeping them in good order.  Reforms to State-Commonwealth relations may involve the States' assuming more responsibility for the nation's, as well as their own, fiscal position.

Of course, policies on debt and deficits cannot be determined in isolation from those on taxation and spending.  Borrowing is, ultimately, deferred taxation;  and in the final analysis the key concern must be the extent to which government expenditure is justifiable.  For clarity and brevity, taxation policy is separately considered in Chapter 4, and spending in Chapter 5.

The first step in developing a debt management strategy must be to ascertain and explain the condition of the State's finances -- to know where we want to go, we need to how where we are, and how and why we got here.

The second step is to formulate a coherent debt management strategy which sets out the principles and a set of targets for the State debt and deficit and other liabilities, to be achieved over the term of the government, using as a benchmark the debt management strategy released by the WA government in mid-1992.

The third step is to put into place reforms to the existing political, administrative and constitutional systems which will lock in the strategy.

COMMUNICATE THE FULL PICTURE

The first step in designing a debt management strategy, and other aspects of fiscal policy, is to assess the state of the State's finances;  a task which is as difficult as it is important.  The past is important, as it tells us how we got to where we are now:  in particular, what policies were actually put in place, what their consequences were, and how much of a legacy or handicap we must now bear because of those policies.  It is also obviously important for the government, the Parliament and the voters to have some idea of the direction in which the State's finances is likely to be heading under current policy settings,

Gaps in Information

This first step must be a tentative one, as the information publicly available on the State's finances is deficient in a number of important areas.  Although the quality and quantity of published information on, and analysis of, the State's finances have improved in recent years (and will necessarily keep improving), key bits of information are still missing -- including forward estimates of spending, revenue and debt;  and data on the changes in assets and liabilities and depreciation over time.  Existing policy settings, moreover, are not clear;  there is a paucity of objective analysis of the State's performance;  and the data on the State's finances are highly fragmented.  In fact, the information available on Western Australia's finances lags behind that available on all other State and Territory governments.

Commission of Audit

The new government should, as a matter of priority, commission an independent audit of the State's finances.  This should be undertaken not in the expectation of finding wrong-doing or in the expectation of uncovering additional liabilities, but rather to obtain a thorough, objective assessment of the State's fiscal position and future policy options.  The audit will be of use to the Executive, but its main target audience should be the Parliament and the public.  These are the groups which are currently most in the dark.  An ancillary benefit of the Commission will be to lay the foundations for more thorough reporting and analysis of the State's financial position on an annual basis in the State's budget documents.  The Commission of Audit should be considered as one of a number of actions designed to improve the accountability of government.

Enough, however, is now known of State's fiscal performance and position to provide the foundations of a debt strategy.

LEGACY OF FHE 1980s:  HANDICAP OF THE 1990s

Rapid Growth in State Debt

During the 1980s, Western Australian governments, like many private organisations and some other (but not all) State governments, dramatically increased the State's level of indebtedness. ⁽¹¹⁾

As of 30 June 1992, the gross indebtedness of the Western Australian public sector was $11.3 billion or $6850 per head of population (see Table 3.1).  In contrast, public sector debt stood at $3.2 billion in 1982.  The State's public sector also held, at the end of 1992, financial assets valued at $3.2 billion, which, when deducted from gross debt, results in a level of net indebtedness of $8.1 billion.  Since these financial assets are fully utilised in the operation of the government and could only be freed-up by the closure of government, gross debt is the most appropriate measure of State debt. ⁽¹²⁾

Table 3.1:
WA Public Sector Debt ($ billion, as of 30 June)

	1991 (a)	1992 (a)	1993 (b)
Gross Debt	10.1	11.3	11.6
Net Debt	7.6	8.1	8.4

Sources:

^(a) WA Treasury (1992) Analytical Information in Support of the Treasurer's Annual Statement:  1991-92

^(b) Estimated by the author using data supplie in 1992-93 WA Budget

Between 1982 and 1992, ⁽¹³⁾ the indebtedness of the State's public sector expanded rapidly by all measures (Table 3.2):  in dollars of the day it grew by 257 per cent;  in real per capita terms it grew by 56 per cent;  it grew as a share of the State economy -- from 22.7 per cent of Gross State Product (GSP) to 29.2 per cent of GSP;  and, given that debt had actually shrunk in real per capita terms during the preceding decade (1971-1981), it grew in relation to recent experience. ⁽¹⁴⁾

Table 3.2:
Growth in WA Public Sector Debt 1982 to 1992

Terms:
Nominal	257%
Real per Capita	52%
As Share of GSP	6.5% points (from 22.7 to 29.2)

Sources:

WA Treasury, Analytical Information in Support of the Treasurer's Annual Statements 1988-89, 1989-90, 1990-91 and 1991-92;  Debt defined as net loan liabilities measured on current value basis for total public sector.

Population:  ABS Cat. No. 3101.0.

GSP:  1982-91 from ABS Cat. No. 5220.0, 1992 estimated by the author and assumes 4.0 per cent real growth in GSP.

Deflator:  Non-farm GDP deflator:  1982-1991 from ABS Cat. No. 5204.0;  1992 from 1992-93 Commonwealth Budget Paper No. 1.

State Debt Still Growing

Public sector debt did decline during the late 1980s, if measured as a share of GSP.  This decline was, however, temporary, and reflected the rapid and unsustainable growth in GSP, not a reduction in borrowings.  In fact, between 1986 and 1992, State debt per head grew by 51 per cent -- hardly a sign of borrowing restraint.  Moreover, as the State's economic growth declined in 1990, debt began again to grow as a proportion of GSP;  and in 1992 it reached its highest level since the early 1970s.

Although there are no official projections of State debt for 1993, the available data on public sector estimates of financial transactions indicate that it will again grow in 1993, albeit at a lesser pace.  As shown in Table 3.1, gross State debt is likely to expand by 3 per cent, or to around $11.6 billion, by the end of 1993;  and net State debt is likely to expand by around 4 per cent -- rates much lower than recorded in recent years. ⁽¹⁵⁾

Public Trading Enterprises Account For Most Debt

State debt is predominantly in the Public Trading Enterprises (or PTE) subsector, and particularly in the larger utilities.  In 1992, the PTE subsector accounted for $6.7 billion, or 60 per cent of State debt.  The State Energy Commission of Western Australia (SECWA) accounted for the largest proportion (34 per cent), with most of this acmu1ated since 1981.  The Water Authority (3 per cent), Homeswest (6 per cent) and Westrail (3.5 per cent) are the next largest contributors to total State debt. ⁽¹⁶⁾

Figure 3.1:
WA State Debt ^(a) by Subsector, 1980 to 1992 (real per capita ^(b))

^(a) Net loan liabilities include liabilities arising from WA Government Holdings.

^(b) Deflated by non-farm GDP deflator with 1991 base year.

Sources:

"Report on State Debt", Report No. 25, Public Accounts and Expenditure Review Committee, Legislative Assembly of Western Australia, December 1992.

WA Treasury, "Analytical Information in Support of the Treasurer's Annual Statements", November 1992.

Although the PTE subsector still accounts for the largest share of debt, its share has been declining (see Figure 3.1).  Measured in real per capita terms, PTE subsector debt reached a historic peak in 1986 ⁽¹⁷⁾ with the completion of the Dampier-Perth gas pipeline and its associated infrastructure, and has decreased steadily ever since.  In 1992, PE subsector debt declined both in absolute terms and as a share of total State debt;  and this trend will continue in 1993.

PTEs Are Still Tools Of The Government

The fact that the bulk of the State's debt is held by PTEs does not necessarily mean that the debt has been used to fund investments in commercially viable, self-funding capital projects.  PTEs are, to varying degrees, instruments of the general government subsector.  With only a few exceptions, they are required to pursue a range of non-commercial, and essentially redistributive objectives, ⁽¹⁸⁾ including promoting regional development, providing financial assistance to the disadvantaged, giving preference to local suppliers, subsidising "special" industries and projects, "stimulating economic growth", and protecting or creating employment. ⁽¹⁹⁾  The pursuit of these non-commercial objectives significantly affects the operating results of the PTEs and therefore their level of borrowing.  CSOs are in large part the reason for the PTE subsector's unbroken history of losses.  And, although since 1985 the Western Australian PTE subsector has shown a marked improvement in its operating performance, with its net operating losses declining each year in nominal terms, it is continuing to experience losses and is expected to do so again in 1993. ⁽²⁰⁾

Although the data are very limited, anecdotal evidence indicates that a considerable number of investments by the PTE subsector have not been commercially viable, and in some cases were never designed to be.  Examples abound, including the $250 million spent by Westrail on the suburban rail network, the $427 million borrowed by Homeswest over the last decade for low-cost housing, $36 million spent by Transperth on the Perth city bus station, and the $37 million spent by the Fremantle Port Authority on the dredging of its inner harbour and the development of a boat harbour. ⁽²¹⁾

The level of PTE debt is thus affected by its non-commercial functions and obligations.  For example, SECWA is required to provide subsidies to rural electricity consumers:  this reduces SECWA's net earnings, and so increases its dependence on debt-funding of capital works.  In turn, that subsidy will, by inducing higher demand for electricity in higher-cost areas, increase SECWA's need for capital outlays and borrowing.

The PTE subsector receives some compensation from the budget for its non-commercial functions.  In 1992, around $332 million was paid to PTEs in the form of subsidies, grants and advances from the general government subsector.  However, these payments do not represent total cost to the PTE subsector arising from the non-commercial functions.

PTEs also possess, in varying degrees and forms, the power to tax, and thus, like general government, in part they directly exploit taxpayers.  For example, SECWA operates as an integrated energy monopolist with extensive powers over the pricing, transmission and use of gas and electricity.  Our governments have exploited and continue to exploit SECWA's monopoly powers to levy, albeit selectively, higher-than-commercial charges, which enable it to fund an extensive range of non-commercial investments and other activities.  Thus SECWA's charges are in part a tax, and are commonly perceived by politicians and consumers as such.  The Water Authority not only imposes de facto taxes by way of higher-than-commercial water charges, but, by levying its sewerage charges on the basis of land values, also directly imposes a tax -- a land tax -- similar to that levied by the general government subsector.  Homeswest not only is exempt from a range of taxes -- an implicit subsidy not recognised in the data referred to above -- but has the power to acquire land, buildings and other property at a highly subsidised rate.  There are numerous other examples of the use of taxing powers, both explicit and implicit, by PTEs to fund non-commercial activity.  Further, the use of tax or monopoly powers by the PTEs has been directly exploited to fund general government subsector activity via the payment of higher-than-normal dividends.  Indeed, in some states (but not in WA), PTEs have become the source of very large tax revenues.

The PTE subsector has, however, become more commercially orientated over the last decade.  If the corporatisation policies currently in place ⁽²²⁾ are widely implemented, the extent of commercialisation will increase.  There are, moreover, large differences as between the various PTEs, in terms of their access to and use of tax-like instruments, and their commercial orientation.  Nonetheless, the liabilities from past non-commercial decisions remain, and some PTEs, such as Homeswest, will continue to be inherently redistributive and non-commercial.  Thus the distinction between PTE and general government debt is, in part, illusory.

General Government Debt Growing Rapidly

Although the general government subsector currently accounts for a minor share of State debt, its level of indebtedness has nevertheless grown rapidly both in absolute terms and as a share of State debt (see Figure 3.1).  As of June 30 1992, general government agencies accounted for $4.6 billion or 40 per cent of total State debt.  This represents a 150 per cent increase in real per capita terms over the 1982-92 period and a doubling of the share of debt.  General government debt is estimated to increase further again in 1993, with almost all anticipated public sector borrowing in 1993 being designated for the genera1 government subsector.

Financial Institutions Losses A Large Cause Of Debt

Debt owed by the general government subsector is not thoroughly broken down on an agency-by-agency basis.  Nonetheless, between 1982 and 1992, a substantial proportion of this debt was actually incurred to bail out State financial institutions.  Between 1988 and 1992 at least $675 million was borrowed by the general government subsector to provide capital to State financial institutions forced to write off assets lost through WA Inc and other failed business loans.  This included $420 million to the R&I Bank, $80 million to SGIO, and $175 million to Western Australian Government Holdings Ltd (WAGH).  These debts represent about 15 per cent of all general government debt.  The R&I Bank and the SGIO are reportedly required to service the moneys borrowed on their behalf by the general government subsector by way of higher dividends.  Even if they do so successfully, however, this will only be achieved at the cost of dividends or asset values that would otherwise have been available to taxpayers.  The borrowing thus represents an unproductive use of State borrowings, that is, capital being expended for no return.

It can also be argued that the $161 million paid from the budget to meet the losses of the Teachers Credit Society and the Swan Building Society was, in effect, indirectly financed through additional government borrowing, for at the time these expenditures were incurred, the general government subsector was running a large budget deficit.

Large Losses Remain In Financial Enterprises

The official estimates of State debt referred to above do not include all the losses of State financial institutions. ⁽²³⁾  Specifically, they do not included the losses incurred by the Government Employees Superannuation Board (GESB), and the State Government Insurance Corporation (SGIC).  These State-owned financial institutions experienced significant losses during the last 5 years as a result of WA Inc and other investment decisions.  Although the full extent of these losses is not yet known, they will certainly be large, and represent a significant reduction in the financial assets previously available to taxpayers.  Between 1988 and 1992, the SGIC wrote down assets or realised losses to the extent of approximately $520 million as a result of politically-motivated investment decisions.  During the same period and for the same reasons, the GESB wrote down assets of $234 million.  These losses represent a decline in the State's asset base, and indirectly contribute to the State's indebtedness through the elimination of revenue from asset sales and dividends.

Importantly, the losses of the SGIC and the GESB are being funded, in part, by taxpayers through special relationships and dealings with the State government.  The SGIC, which had a negative net worth of $354 million as of 30 June 1992, has only been able to avoid an explicit injection of funds from the State government by exploiting its exclusive right to provide third party insurance and to provide insurance to various State government agencies -- in other words, by utilising its power to impose taxes on select insurance transactions.  The SGIC also has preferential rental arrangements with the State government for some of its central business district properties.  The GESB not only has similar preferential rent arrangements, but all of its investments are underwritten in full by the State government and all cash deficiencies are met directly by the State Treasury.

Debt Has Been Used For Consumption Purposes

Successive State governments have consistently argued that, at least for the general government subsector, borrowings have been used solely for capital purposes.  Indeed, this principle underpins the structure and classification of its accounts, with all borrowings, and loan repayments and most, but not all, receipts of a capital nature and all expenditure of a capital nature by the public sector (except for a number of PTEs), being required, by the Financial Administration and Audit Act, to be credited to the General Loan and Capital Works Fund (GL&CWF). ⁽²⁴⁾

This is at odds, however, with the available data -- limited as they are -- which indicate that a large proportion of the debt accumulated by Western Australia's public sector (both FTE and the general government subsectors), over the last fifteen years has been used for funding capital consumption rather than new capital investment.  As shown in Table 3.3, the Australian Bureau of Statistics (ABS) estimates that the the State's public sector increased its net stock of fixed assets -- gross fixed capital less depreciation or capital consumption in 1985 dollars -- by $4.1 billion over the 1977-91 period.  During this period, the public sector is estimated to have increased its net debt by a much larger amount -- around $6.2 billion in 1985 dollars -- which indicates that about $2.1 billion or 34 per cent of total net debt accumulated over the period was used to fund spending for capital consumption purposes.  These data also show that the use of borrowings for consumption purposes has not been restricted to Labor governments.  During the six years prior to 1982, the coalition governments of the day also borrowed, albeit at a lower rate, for current purposes -- about 30 per cent of total borrowings.

The level of borrowing used for consumption purposes has been extremely high in the general government subsector.  During the 1978-1991 period, general government accumulated, in 1985 dollars, new net debt of $2.7 billion, of which $1.6 billion or 59 per cent was used to fund current spending.

Table 3.3:
Use of borrowing 1978-1991 ($ Billion, 1984/85 Dollars)

	General Government	Total Public Sector
Borrowing (a)	2.7	6.2
Net Investment (b)	1.1	4.1
Net Mining Royalties (c)	1.4	1.4
Borrowing less net investment	1.6	2.1
% of Total Borrowing	59%	34%
Borrowing minus net investment plus royalties	0.2	0.7
% of total borrowing	7%	11%

Sources:

^(a) ABS Cat. No. 5501.0;  borrowing estimated as deficit less advances paid over the 1978-91.

^(b) ABS Cat. No. 5220.0;  net investment calculated as gross fixed capital investment less consumption of capital (depreciation) over the 1978-91 period.

^(c) WA Budget Papers;  net mining royalties calculated as mining and petroleum royalties less expenditure for administration (outlays of Department of Mines and Energy) deflated by the 10-year Treasury Bond rate to reflect the growth in the in situ value of the resources.

The use of debt for consumption purposes is continuing, and makes up a significant portion of the deficit.  Data provided by State Treasury with the assistance of the ABS ⁽²⁵⁾ show that, at least for the general government subsector, a large proportion of the net debt incurred in 1992 was used for consumption purposes.  During 1992, about 68 per cent of debt incurred was used for consumption purposes, if depreciation is measured on a current cost basis;  and about 30 per cent of the increase in net debt was used for consumption purposes, if depreciation is measured on a historical cost basis.  The use of debt by the PTE subsector is more problematic;  depending entirely on how depreciation is measured.  An examination of the 1993 GL&CWF shows that a significant proportion of expenditures is clearly not in the nature of additions to the capital stock, but rather replacement of capital which in the past was funded through the Consolidated Revenue Fund.

The discrepancy between the constant official rhetoric and the actual results shown in Table 3.3 arises from four main causes.

First, the government defines the repair and maintenance of existing assets as a capital outlay.  As a result, it has borrowed to fund the depreciation or consumption of capital which, being a recurring item of expenditure, is more appropriately defined -- as indeed it is by the ABS in the State Accounts, (Cat.  No.  5220.0) -- as current expenditure.  Second, it has used long-term borrowings to fund short-lived assets such as computers.  Third, it has borrowed to bail out FTEs and to offer financial assistance to private firms.  Fourth, it includes as capital some items of expenditure which are unambiguously recurrent in nature -- such as office rental, superannuation and redundancy payments, and consultants' fees.

Capital Revenue Used For Current Outlays

Western Australian governments have consistently used revenue from the sale of physical assets such as land ($62 million in 1992) and motor vehicles (about $20 million in 1992), and from the sale or use of financial assets such as cash balances (around $160 million in 1989) to fund current expenditure.  Under the National Accounts framework, these revenue sources are treated correctly;  the sales of physical assets are treated as an offset to capital expenditure -- effectively as negative outlays -- and consumption of financial assets is treated as a funding transaction and part of the deficit.  The use of capital revenue for recurrent purposes is another reason why the State has been able to give the appearance of using debt only for "capital" purposes (see Table 3.3).

Governments have also used income from mineral royalties, which should be treated as capital revenue, to fund recurrent outlays.  The Western Australian government obtains a large share -- larger than any other State -- of its own-sourced revenue from mineral royalties:  $2 billion in real terms over the 1982-93 period and $398 million in 1992.  In fact, in 1992, mineral royalties were the largest State source of revenue after payroll tax.  Royalties are not a tax, but a payment for the use of a capital asset.  Since these assets -- mineral and petroleum deposits -- are non-renewable, royalties represent payments for the right to consume a public asset.  In this sense, royalties are tantamount to asset sales, and similar to the sale of land, buildings and business ventures.  As such, they should be treated as capital revenue and as constituting a reduction in the stock of public assets.  It must be said, however, that under both the National Accounting framework and the State public accounts format, royalties are treated as current revenue, and the reduction in public assets denoted by royalties are not reflected in estimates of capital expenditure or changes in capital stock.  Nevertheless, if royalty receipts are considered as consumption of public capital and deducted from capital stock, then the net capital stock of the public sector would in real terms have increased by only $700 million over the 1978-91 period (see Table 3.3), and around 89 per cent of borrowings would be deemed to have been used for consumption purposes.  The impact on the general government subsector is much more dramatic, largely because all royalty income is used by this subsector.  Income from mineral royalties exceeded net investment in the general government subsector:  the implication being that over 93 per cent of the debt incurred over the 1978-91 period was in the final analysis used for consumption purposes.  A portion of Western Australia's above-average royalty receipts is siphoned away from this State to the other States via the Commonwealth grants process. ⁽²⁶⁾  Nonetheless the core of the argument remains, that royalties are large and are a capital revenue and have in effect been used for consumption rather than to increase the State's capital stock

Other Financial Liabilities

Debt or loan liabilities are not the only type of financial liabilities borne by the public sector.  Others include employee-related entitlements (such as leave entitlement, unfunded superannuation, workers' compensation), and accounts payable, foreign exchange contracts and other accrued interest payments relating to debt-raising (see Table 3,4). ⁽²⁷⁾

The financial liabilities of the public sector (excluding guarantees, indemnities and sureties) are listed in Table 3.4.  In 1992, the State public sector had total financial liabilities of $17.8 billion, representing 46 per cent of GSP.  State debt constituted the bulk (61 per cent) of total liabilities.  Employee entitlements, however, were also large, at $5 billion or 28 per cent, of which unfunded superannuation liabilities represented $4.4 billion.  There are no published data on employment and other non-loan liabilities prior to 1991;  it is, thus, not possible to estimate the growth in such liabilities over the last decade.

Table 3.4:
WA Public Sector Financial Liabilities and Assets ($ million)

	Public Trading Enterprises		General Government		State Public Sector
Year	1991	1992	1991	1992	1991	1992
Borrowings	6879	6779	3031	4153	9856	10905
Employee related entitlements (a)	1233	1182	3545	3808	4778	4990
Other (b)	757	872	1194	1614	1469	1896
Total Liabilities	8869	8833	7770	9575	16103	17791
Financial Assets (c)	1862	1848	2486	3496	3812	4727
Net Financial Liabilities	7007	6985	5284	6079	12291	13064

^(a) These include:  leave entitlements;  superannuation;  workers' compensation.

^(b) This includes:  overdrawn bank and operating accounts;  accounts payable;  finance leases;  other liabilities and accruals;  moneys held in trust.

^(c) These include:  cash, bank and operating balances;  accounts receivable;  other debts, accruals and prepayments;  investments;  loans and advances.

Source:  WA Treasury (1992), Analytical Information in
Support of the Treasurer's Annual Statements, 1991-92.

It is significant that, unlike the composition of State debt, the general government subsector has the largest share of the State's total financial liabilities;  and total liabilities have exhibited very strong growth in recent years.  In 1992, the general government subsector had financial liabilities of $9.6 billion (which represented 54 per cent of the State's total), a massive 23 per cent increase on the previous year.  The PTE subsector, on the other hand, actually reduced its financial liabilities in 1992.  The reason for the higher concentration of total liabilities in the general government subsector is that most (76 per cent) of employee entitlements are in the general government subsector.

The Western Australian public sector does, of course, have financial assets, which in 1992 stood at $4.7 billion.  The lion's share (74 per cent) of these assets are in the general government subsector.  Since these financial assets are fully employed in the day-to-day operations of government and their liquidation would require the cessation of all government functions, it makes little sense to offset these against financial liabilities.  Notwithstanding that, net financial liabilities (total financial liabilities less financial assets) of the public sector stood at $13.0 billion in 1992, with a large portion (47 per cent) in the general government subsector.  It is also relevant that the level of net financial liabilities in the general government subsector grew by 18 per cent in 1992.

The public sector also has substantial contingent liabilities, arising from guarantees, indemnities and sureties, and standing at $705 million in 1992.  These liabilities have shown a high level of volatility over the last decade because of WA Inc deals.  Even excluding those deals, however, contingent liabilities have grown sharply in recent years:  by 26 per cent in 1990-92.  Moreover, these estimates do not included the large liabilities that could arise from the legal action, commenced by Bond Corporation Holdings Limited and others against the State for an aggregate of approximately $550 million, for alleged breaches of contract in relation to the failed petrochemical plant in Kwinana. ⁽²⁸⁾  Nor do they include the underwriting of bondholders by the State Housing Commission for the Keystart Housing Scheme.

These liabilities are of policy significance:  they can be used, as they have during the 1980s, as substitutes for debt.  Since these liabilities are subject to little analysis or scrutiny, and are often shielded from Parliamentary and public scrutiny through the specious excuse of "commercial confidentiality", their use significantly undermines the accountability of State finances and specifically the State debt.  Perhaps more crucially, recent policy initiatives will lead to further expansion of these contingent liabilities:  specifically, the policy to encourage private "equity" funding of public infrastructure. ⁽²⁹⁾  One of the potential effects of this policy is to shift the source of funds for public infrastructure from debt to equity.

Debt-Servicing Cost

The rapid growth in State indebtedness, coupled with the higher cost of funds, resulted in a massive increase in the State's interest bill over the 1980s (Figure 3.2).  In 1992, the State's net interest bill -- interest paid less interest received -- was $937 million, which in real terms represented a 148 per cent ⁽³⁰⁾ increase over 1982.  The State's net interest bill increased from 8.8 per cent of total revenue in 1982 to 14.6 per cent in 1992, or 5.8 percentage points, which in 1992 dollars was equivalent to $380 million or the amount spent on welfare services.

The growth in gross interest payments by general government over the 1980s was nothing short of alarming.  After 1986, interest payments more than doubled in real terms largely as a result of Canberra's tight monetary policy;  it outpaced the growth in all other types of expenditure and was the major force behind the steady growth in total outlays over the 1986-91 period.  The decade of the 1980s was very costly in terms of borrowing.  The average rate of interest paid by the public sector was only 6 per cent in 1980;  by 1982 it had jumped to 9.9 per cent, and increased thereafter until peaking in 1989 at 12.5 per cent.  The cost of funds to the States has decreased since 1989;  hence the decline in Western Australia's public sector interest bill in recent years (Figure 3.2).  While rates similar to those prevailing in 1989 and 1990 are unlikely to return in the foreseeable future, interest rates now seem to have bottomed.  It is unlikely, therefore, that the debt burden on the taxpayer will be eased as a result of lower interest rates per se.

Figure 3.2:
WA Public Sector Net Interest ^(a) and Debt Service Ratio ^(b)

^(a) Net interest equals interest payments minus interest received;  revenue excludes interest received

^(b) Net interest as a share of total revenue

Source:  ABS Cat. No. 5501.0

Superannuation Costs Are High And Growing

Data on superannuation payments are limited, but what are available indicate rapid growth.  In 1992, gross superannuation payments from the Consolidated Revenue Fund (CRF) totalled $285 million, representing a 160 per cent real increase over 1988 and a 27 per cent increase over 1991.  The increase in superannuation payments in 1992 is in part due to the special redundancy programme of that year, and thus the growth in payments should, without a change in policy, slow over the term of the new government.

Public Sector Remains In Deficit

The State public sector is in deficit and, on present policies, seems likely to remain so (see Figure 3.3).  The public sector was in deficit throughout the 1982-92 period, with deficit spending growing, albeit irregularly.  The public sector deficit for 1992 reached $405 million.  The outlook for 1993 is for a public sector deficit of $453 million -- an 11 per cent increase on the previous year.

Though the deficit can be funded, as it must be, from a number of sources, including cash balances, and proceeds from the liquidation of financial assets, in the main the funding will come from new borrowings, including advances from the Commonwealth.

Figure 3.3:
Total Public Sector Deficit 1977-78 to 1992-93 ($ million)

Source:  ABS State Accounts, Cat. No. 5501.0

Budget Deficit Is Structural

Contrary to the rhetoric of successive State governments, the Western Australian general government subsector -- the National Accounts analogue of the budget sector -- was not in balance in any year during the last 10 years and incurred a deficit of $464 million in 1992.  Moreover, in 1993 the general government subsector is again expected to have a deficit of $346 million.

The absence of forward estimates of expenditure and revenue prevents an assessment of the State's financial outlook beyond 1993.  Nevertheless, the available evidence indicates that, under the policy settings in place at the time of writing, the Western Australian general government subsector will remain in deficit through the term of the new government.  This conclusion is supported by both major credit rating agencies.  As stated in its 1992 Credit Report, "Moody's expects Western Australia to continue to incur heavy borrowing requirements well into the 1990s". ⁽³¹⁾

The State's deficit is structural rather than cyclical in nature.  That is, the general government subsector is expected to remain in deficit even after deducting abnormal items, such as capital for financial institutions (the R&I Bank and the SGIO) and the counter-cyclical capital spending undertaken in 1993, and despite the cuts to the public sector workforce and other spending restraints instituted by the government in 1991 and 1992.  Although Western Australia may continue to experience faster than average economic growth among the States, forecasts of much stronger growth than in recent years ⁽³²⁾ are unlikely to be realised given the constraints on Australia's economic growth imposed by external debt and other factors.

Deficit Driven By Politics Not Economics

A widely accepted rationale for borrowing by the public sector is that it allows governments to act as a stabilising force in the economy.  There are numerous variations on this argument, but essentially they all boil down to the notion that the public sector should run deficits during periods of recession in the economy and reduce its deficit (or, in fact, run surpluses) during periods of high growth (such as that experienced between 1986 and 1989).

Even if this approach were accepted as appropriate for a State government, ⁽³³⁾ there is a question as to whether the fiscal policy of this State's public sector has in fact been implemented in a way that was counter-cyclical.  Certainly, our governments have regularly justified large deficits by the need to stimulate the economy.  Indeed, the increased deficit planned for 1993 is justified primarily on just this "need".  But the pattern of deficit spending by the total public sector and general government subsector does not in practice show any discernible relationship with various indicators of aggregate demand, such as growth of GSP, household income, or unemployment

If anything, the cumulative fiscal policies of successive State governments over the last decade appear to have acted more as a destabilising force.  The public sector did run large deficits during periods of low growth, such as 1982-83 and 1990-93;  but it ran even higher deficits during the boom times.  During those times, as in the late 1980s, when the State and national economies were very clearly overheated, the Western Australian public sector not only ran large deficits, but stepped up the rate of growth of public expenditure by offsetting reductions in Commonwealth grants with large increases in tax receipts, the use of cash balances and asset sales.  The Western Australian public sector thus pursued a highly "stimulatory" fiscal policy during a period when national economic policy was seeking restraint.  And then, during the recession which followed the boom, the State public sector pursued a relatively contractionary fiscal policy, with large tax increases in 1990, and restraint on expenditure growth through to 1993, entailing cuts to the public sector workforce.  The government did maintain large deficits during this recession, but these were driven in large part by the losses in FTEs already mentioned, and an expenditure overhang from the boom times.

On any dispassionate reading, the evidence indicates that Western Australian governments did pursue a "stabilisation" policy:  it was, however, directed less at the business cycle than at the political cycle.  As shown in Figures 3.3 and 3.4, the deficits of the total public sector and the general government subsector display a discernible pattern, of large increases in pre-election years -- 1983, 1986, 1989, and 1993 -- and even though the size of the deficit was reduced in non-election years, these reductions did not offset the large increases committed in election and immediate post-election years.  As a result, there is a distinct "ratchet" growth pattern in deficit spending over the 1980s.

Capital Spending As A Whole Is Not Lumpy

Contrary to the frequent claims of governments, there is little evidence that borrowing is required to finance general government capital spending because of its "lumpy" or uneven nature.  Although within particular agencies capital spending can be very uneven, across the general government sector as a whole the peaks and troughs tend to offset each other, so that the path of total capital spending is quite even on an annual basis.  In fact, as we might expect, the level of capital spending appears to be more sensitive to other policy factors, such as the stage of the political cycle, expenditure restraint, and economic growth, than to the size of individual projects.

Figure 3.4:
General Government Deficit, WA, 1977-78 to 1992-93 ($ million)

Source:  ABS State Accounts, Cat. No. 5501.0

COMPARISONS BETWEEN STATES

To put the matter into perspective, the Western Australian public sector, largely because of the inherent strength of the State's private sector, is in a sound financial position.  It is not confronting a crisis of Victorian proportions;  and it is in a far better fiscal position than the other, "southern" states.  Nevertheless the State's finances have deteriorated significantly in recent years.

In other words:

• There has been excessive borrowing, primarily to avoid the politically-hard decision of raising taxes to finance election promises.
• This has imposed an excessive burden on the State which, at the margin, has probably had adverse effects on economic activity.
• Notwithstanding this, the investment opportunities available to the private sector in WA have been sufficient to allow the State to grow faster than average and avoid Victoria's problems.  In a sense, there have been two States in WA -- one in the private sector;  the other in the public sector.

How Does Western Australia Stand Relative To Other States?

In terms of accumulated liabilities, the Western Australian public sector is in the middle rank of the Australian States (see Tables 3.5, 3.6 and 3.7).  In terms of key credit indicators, its public sector ranks below New South Wales and Queensland, and (in 1991) on a par with South Australia and above Victoria and Tasmania.  Public sector net debt in Western Australia was estimated by S&P Australian Ratings ⁽³⁴⁾ to have been $5315 per capita in 1991, which was 77 per cent higher than Queensland and 47 per cent higher than New South Wales.  Its public sector interest bill, measured as a share of current revenue, was also much higher than either Queensland or New South Wales;  in fact double Queensland's.  Although its net debt and debt-servicing costs were substantially larger than those of New South Wales and Queensland, they were much smaller than Victoria's and Tasmania's.  For example, in 1991, public sector net debt in Western Australia was 28 per cent less per person than in Victoria and a massive 43 per cent less than in Tasmania.  Indeed, the Tasmanian public sector had amassed a net debt equivalent to 40 per cent of that State's GSP by 1991 -- almost double the level of Western Australia.  While in 1991 Western Australia's financial position was on a par with that of South Australia, in subsequent years the level of debt and debt-servicing of the latter's public sector has soared due to the losses of its State Bank.

Table 3.5:
Key Credit Indicators, Australian States, June 1991

	NSW	Vic	Qld	WA	SA	Tas	Six states
Net Debt --   Per capita $   % of GSP   % of Budgetary Revenue	3,624 15.9 71.7	7,792 28.9 141.4	2,990 15.4 50.4	5,315 22.6 93.1	5,381 27.3 99.2	7,582 40.2 138.5	4,772 21.6 90.9
Net Interest Payments --   % of Operating Revenue	8.9	18.2	5.7	11.8	9.6	13.4	11.0
Contingent Liabilities as % of GSP --   State Financial Enterprises   Unfunded govt liabilities	14.0 11.4	5.5 18.6	7.7 0.0	24.2 10.6	104.0 11.5	13.7 12.0	18.7 11.6

Source:  S&P Australian Ratings, Monthly Ratings Bulletin, April 1992

Table 3.6:
Operating Budget Indicators, General Government Sector, 1990-91

		NSW	Vic	Qld	WA	SA	Tas	Six states
Operating balance *   per capita   % of op. expenditure *	$m $ %	218 37 1.1	-806 -183 -5.9	957 326 11.7	74 45 1.3	-76 -52 -1.5	17 37 0.9	384 23 0.7
Own-purpose op. expenditure *	% ch	10.6	5.7	8.9	6.8	7.7	5.0	8.2
Own-source op. revenue *	% ch	6.5	-0.1	6.6	2.1	10.1	9.4	4.7
Net interest coverage	X	1.2	0.4	3.7	1.2	0.7	1.1	1.1

Source:  S&P Australian Ratings, Monthly Ratings Bulletin, April 1992

* Note:  excludes extraordinary transactions

Table 3.7:
Financial Indicators, PTE Sector, 1990-91

		NSW	Vic	Qld	WA	SA	Tas	Six states
Cost recovery ratio	%	218	-806	957	74	-76	17	384
Net interest coverage	X	37	-183	326	45	-52	37	23
Internal financing ratio	%	1.1	-5.9	11.7	1.3	-1.5	0.9	0.7
Debt payback period	yrs	10.6	5.7	8.9	6.8	7.7	5.0	8.2
Dividends/operating revenue	% ch	6.5	-0.1	6.6	2.1	10.1	9.4	4.7

Source:  S&P Australian Ratings, Monthly Ratings Bulletin, April 1992

In terns of the liabilities of State financial enterprises -- which are not treated as part of public sector debt -- Western Australia rates very poorly.  Indeed, its FTEs had liabilities equivalent to 24 per cent of its GSP;  a level only exceeded by South Australia whose FTEs had amassed liabilities equivalent to 104 per cent of that State's GSP.  Victoria would also have had a horrendous level of liabilities in its FTEs if its State Bank had not been sold.  Queensland, again, had, by a large margin, the lowest level of liabilities in its FTEs.

The issue is not just where the State is now, but also where it is going.  As of 1991, WA was heading in the wrong direction, and quickly.  Moody's clearly identified this in early 1992:  "...except for South Australia, and its jump in debt resulting from that State's obligations to its State Bank, absolute growth of both Western Australia's gross and net debt over the last five years to 1991-92 has been the highest of all six States." ⁽³⁵⁾

Fiscal Stance Has Tightened Since 1991

The State government, to its credit, has tightened fiscal policy over the last few years.  Over the three years 1991 to 1993, Western Australia is estimated to achieve the lowest growth in final consumption spending (7.9 per cent) of any State except Tasmania (2.2 per cent), and a rate substantially below the all-State average (11.3 per cent).  The losses of State financial enterprises also appear to have ceased, though these agencies remain, as a group, overloaded with liabilities.  These changes have arrested the degeneration of the State's financial position vis-à-vis the other States, but have not changed its ranking.  Nor have they been enough to stop the growth in liabilities, let alone start eating into the debt accumulated in the 1980s.  Queensland, New South Wales and Tasmania all achieved lower public sector deficits, on a per capita basis, than Western Australia during 1992, and are expected to do so in 1993.

Reduction In Credit Rating

In early 1992, Moody's Investor Services downgraded the ratings of Western Australian government long-term domestic debt from Aaa to Aa1 (see Table 3.8). ⁽³⁶⁾  The other major rating agency, S&P Australian Ratings, made a similar decision in October 1991.  As a result this State's credit rating fell below that of Queensland and New South Wales, which both retained a Triple A rating -- the highest rating available.  South Australia and Tasmania are currently one notch below WA at Aa2.  Victoria is the distant laggard, with a credit rating of A1.

Table 3.8:
Credit Ratings, October 1992

New South Wales	Aaa
Queensland	Aaa
Western Australia	Aa1
South Australia	Aa2
Tasmania	Aa2
Victoria	A1
Commonwealth	Aa2

Source:  Moody's Investor Service.

The reduction of Western Australia's credit rating resulted from the deterioration in the State's financial position.  More specifically, the decisions by the rating agencies to reduce the credit rating were based on the following points:

• "the State's rising debt burden over the last few years and our projections of future borrowing requirements";
• "the deterioration in the State's budgetary position, largely resulting from the slow-down in economic activity";  and
• "the additional financial burden imposed on the State's finances as a result of capital obligations to the State's financial institutions". ⁽³⁷⁾

The main significance of the credit ratings is that they are used by financial markets and investors as an objective means of assessing risk and therefore of determining the cost of borrowing.  At a rough estimate, the recent downgrading of the government's credit rating added about 0.3 percentage points to the annual cost of new domestic borrowings. ⁽³⁸⁾  Thus the high level of public sector borrowing during the 1980s has resulted in an increase in the State's already high cost of borrowing.

The State's large debt burden and the consequent credit downgrading, in concert with the WA Inc deals, undoubtedly undermined business and consumer confidence.  As well as providing financial markets with an independent source of information, credit ratings exert an influence on business and consumer confidence.  Indeed a strong credit rating not only reflects a State's capacity to repay debt, but also an acceptance by the government of the need for sound fiscal management.  During the recent economic downturn those Australian States with superior credit ratings fared better in terms of business and consumer confidence than the States with lower credit ratings. ⁽³⁹⁾

Western Australia Is Not A "Rustbelt" State

While the excesses of the 1980s did erode the State's financial position, nevertheless both the State economy, and, because of the economy, the State's public sector, emerged in a relatively strong financial position.  Western Australia, along with Queensland, is expected to lead the nation in the growth stakes over the term of the government.  The State public sector remains highly rated;  its credit rating of Aal is just one notch below the highest possible (Aaa).  That high rating does not, of course, stem from the quality of its fiscal performance over the 1980s, but rather from its rapidly-developing, resource-rich economic base.

It is important for policy purposes to recognise that the State's economy and therefore its public sector are in far better fiscal shape than those of Victoria, South Australia and Tasmania.  Australia's southern States have long-term structural problems that threaten to produce low economic and employment growth right through to the mid-1990s (see Table 3.9), and suffer as well the burden of very high levels of debt -- and, in the case of Victoria, an alarmingly large deficit. ⁽⁴⁰⁾  Although the Western Australian public sector does have a high level of debt and a sizeable structural deficit, these are lower than those of the southern States.  More importantly, the Western Australian economy is fundamentally strong, has excellent growth prospects, and stands to benefit enormously, more than any other State except perhaps Queensland, from microeconomic reforms -- not least, reforms to tariff protection, the labour market and all modes of transport. ⁽⁴¹⁾

Table 3.9:
Economic Growth Forecasts 1992/93 to 1996/97 (mean of sample survey)

	NSW	VIC	QLD	WA	SA	TAS	AUST
GDP   Standard Dev.	3.2 [0.1]	2.5 [0.2]	3.9 [0.1]	3.7 [0.3]	2.2 [0.2]	2.2 [0.1]	3.1 [0.1]
Employment   Standard Dev.	2.1 [0.1]	1.6 [0.1]	2.8 [0.1]	2.1 [0.3]	1.3 [0.2]	1.3 [0.1]	2.1 [0.1]

Note:  Standard deviation is a measure of the variation of forecasts.  WA has the highest standard deviation indicating that the respondents' forecasts vary more than other States.

Source:  "Survey of Business and Economic Performance and Prospects for Australian States", Business Econometrics and Forecasting Group, UNSW, July 1992.

The fiscal performances of the southern or "rustbelt" States of Victoria, South Australia and Tasmania, are of relevance to Western Australia:  not as a benchmark, but as a warning and an opportunity.  The warning is that high debt and large deficits, particularly in combination with interventionist industrial policy, can do serious damage to an economy.  The opportunity is that people and business will be less interested in remaining or investing in the southern States, thereby providing Western Australia with the opportunity to attract and retain economic activity,

Western Australia's Economic Growth Is Not Assured

Although the State has, by Australian standards, excellent growth prospects, its future is by no means assured.  A recent survey of leading forecasters indicates that most expect Western Australia to experience the second fastest rate of economic and employment growth over the term of the government -- second only to Queensland (Table 3.9).  There was, however, a large level of divergence (as indicated by a higher standard deviation) among the forecasters about Western Australia's growth prospects -- more than for any other State.  Indeed, Western Australia received both the highest (6.1 per cent) and the lowest (1.0 per cent) forecasts of economic growth among the States.  The reason for the divergence of opinion arises, in part, from the narrow structure of the WA economy, but also from the State's fiscal performance, in particular the WA Inc losses discussed earlier.  But whatever the reason, it does indicate that the State's future prospects are far from assured.  It will be particularly important that the State government provide an economic environment conducive to increased private investment.

Queensland Is The Benchmark

The most salient feature of the Australian State sector is the excellent performance and prospects of the Queensland economy.  Over the thee years to 1991-92 -- a period of deep recession -- Queensland out-performed all States according to most indicators, ⁽⁴²⁾ and it is expected to continue to do so over the term of the government (Table 3.9).  As shown by the small standard deviation in the forecast -- less than for any other State -- there is also less doubt among forecasters about Queensland's growth prospects.

Coincident with its record of high economic growth was the unique -- by the standards of Australian states -- fiscal stance of successive Queensland governments.  Over the 1980s, when most other State governments (including Western Australia) pursued a very expansive fiscal policy, with large deficits and higher taxes and charges, Queensland's governments did the opposite.  Successive Queensland governments implemented fiscal measures ⁽⁴³⁾ which included:

• restricting borrowing to commercial purposes;
• no borrowing for general government purposes (in other words achieving a "balanced budget");
• fully funding all future liabilities, including superannuation, workers' compensation, and motor vehicle third party insurance liabilities;
• minimising State taxes and charges;
• ensuring that the PTE sector earn an operating profit, and funding most capital investment from retained earnings;  and
• ensuring that FTEs implement a conservative, low-risk investment strategy.

The effect of these policies, which the current Queensland government is committed to continuing for most of the term of the Western Australian government, is shown in Tables 3.5-3.8.  The Queensland public sector has, by a substantial margin, the lowest level of debt and debt-servicing cost of all the States.  Queensland is the only State whose PTE subsector actually continues to earn an operating profit;  and it has funded over 90 per cent of its capital outlays in that subsector through retained earnings rather than borrowings.  Queensland also has the lowest taxes of any State, and lower charges than most other States.  For example, in aggregate, Queensland imposes taxes at 31 per cent below the all-State average. ⁽⁴⁴⁾  Moreover, it is the only State, apart from New South Wales, which increased public investment in new fixed assets in real terms over the 1988-1993 period. ⁽⁴⁵⁾

The prudent fiscal stance of successive Queensland governments bore fruit during the recent economic downturn.  During the 1990-92 period, Western Australia and all States other than Queensland were, in response to the recession, forced to cut capital works, lay off public servants, and pay out more in interest.  During the same period, the Queensland government was able to increase capital spending by 38 per cent, to employ over 4000 more public servants, cut interest payments by $100 million, and at the same time achieve a balanced budget, retire debt and fully fund all liabilities, without increasing taxes.  The contrast could not be more clear or instructive.

More than that, Queensland's fiscal performance is of particular relevance to Western Australia:  Queensland is the State with which Western Australia most obviously competes for investment, people, and jobs.  It is the State with the most similar economic growth potential and the most similar economic structure.  It confronts a similar pattern of and level of demand for public services and has a similar tax- and revenue-raising capacity to Western Australia's.  As such, Queensland's public sector sets the most appropriate benchmark against which Western Australia's fiscal policy can and should be set and assessed.

Table 3.10:
Fiscal Indicators:  Comparative Performance
Western Australia Relative to Queensland * (Per Capita)

General Government   Tax (1990/91) (a)   Interest Paid (1991/92) (b)   Interest Received (1990/91) (b)   Deficit (1992) (b)   Debt (1992) (b)	27% 82% -29% $489 $1726
Public trading Enterprises   Electricity Charges (1991) (c)   Sewage (1991) (d)   Water (1991) (d)   Interest Paid (1992) (b)   Profit (Loss) (1992) (b)   Debt (1992) (b)	58% 113% -29% 107% ($312) 90%

* Note:  Calculated as per capita level in WA relative to the per capita level in Queensland, and presented in percentage terms if possible, otherwise in dollars.

Sources:

^(a) Commonwealth Grants Commission (1992).

^(b) ABS Cat. No. 5501.0.

^(c) ESAA (1992) Electricity Supply Industry Performance Indicators 1987/88 to 1990/91.

^(d) NT government (1992), Comparative Analysis of Selected Taxes and Charges in the Northern Territory and the States, August.

The government, as shown by Table 3.10, will inherit a fiscal position which is notably inferior to that of Queensland.  In terms of the budget or general government sector, Western Australia imposes taxes which, adjusted for differences in ability to pay or size of tax base, are in per capita terms 27 per cent higher than in Queensland, and it pays out 27 per cent more per person in interest costs.  Because cash balances were run down during the 1980s, the Western Australian public sector also earns significantly less in interest receipts than Queensland's.  The Queensland budget or general government subsector is in surplus and has no net debt -- in fact, it has an excess of financial assets over financial liabilities.  As a result, its new borrowings are roughly $489 per person less than, and its per capita net debt is $1726 per person below, that of Western Australia.  The PTE subsector in Western Australia is also in a worse financial position.  Electricity charges in this State are on average 58 per cent higher than in Queensland.  Charges on sewerage are on average 113 per cent above the level in Queensland;  and while Western Australia does impose on average significantly lower charges for water, for an arid State that can hardly be categorised as an appropriate policy.  Queensland's PTE subsector achieved a higher operating profit ($312 per capita), pays 107 per cent less interest and has 90 per cent less net debt on a per capita basis than does its Western Australian counterpart.

EXISTING DEBT MANAGEMENT PLAN IS INADEQUATE

Although there is no general agreement among economists on what the size of public sector debt or government deficit should be -- not an unusual state of affairs -- there is little disagreement that the level of debt accumulated by the WA public sector during the 1980s was excessive, and that the structural deficit to be inherited by the government is too high, particularly given the large portions used to fund consumption.  The question, then, is how much should the deficit and State debt be reduced?

In mid-1992, the Western Australian government announced a debt management plan ⁽⁴⁶⁾ designed to reduce the public sector deficit and debt.  The central objective of the plan is to reduce State debt to a level consistent with achieving, or rather retrieving, a "Triple-A" credit rating.  This is to be achieved by restricting the growth of the public sector deficit to one percentage point less than the growth in GSP until the public sector debt falls to below 18 per cent of GSP -- the level generally believed to be consistent with a Triple A credit rating.  The plan also stated that the repayment of general government debt would be accelerated, so that such debt would be paid off over 25 years.  The plan also included a commitment to reduce expenditures and taxation as a proportion of GSP, and a commitment to monitor and report annually on these targets, as part of the budget process.

Although this debt management plan is an improvement on the past, and unambiguously a move in the right direction, it falls short of being an adequate strategy for the next government.  Specifically, it fails to distinguish between borrowing for commercial and non-commercial activities;  it fails to distinguish between borrowing for capital and current purposes;  it fails to consider adequately the need to make up for the profligacy of the past;  it fails to confront squarely the competition from Queensland and other States;  it fails to consider all the relevant aspects -- ability, desirability, appropriateness -- of counter-cyclical spending;  and it fails to address the systemic tendency toward excessive borrowing by governments.

Need To Separate Commercial From Non-Commercial Functions

Those functions of government that are clearly nominated as operating on a commercial basis should, in respect of debt policy, be treated differently from those functions that operate through non-commercial means.  The existing debt management plan fails to make this distinction.

The funding decisions of the commercial activities of government have, at least potentially, an inbuilt discipline -- the market place.  They are, therefore, less prone to excessive borrowing or spending.  Furthermore, because they are funded through user charges, there is a direct link between the beneficiary and the funder of these goods and services.  They also tend to provide physical infrastructure which yields a direct and quantifiable financial return to users.

The general government subsector is fundamentally different.  An important objective of the general government subsector is redistribution:  that is, to provide services to people who "need" them, financed by people who can "afford" to pay.  There is thus no discipline other than that imposed by the political process.  General government services generally do not yield a financial return to the community in order to meet their establishment and maintenance costs.  And there is no visible link between those who pay for and those who benefit from the services.

It could be argued that there should be no borrowing limits imposed on the commercial operations of government, but rather that the funding decisions should be left up to the market place.  The problem is that PTEs are not entirely structured or operated on commercial grounds.  Their borrowing and spending policies are very significantly influenced by various non-commercial objectives.  As long as the distinction between the PTE and the general government subsectors remains blurred, the funding policies of the PTE subsector should be subjected to limits imposed by the government.  The imposition of a borrowing limit could have adverse effects on commercial activities:  capital works might be inappropriately postponed, or user charges forced up in order to fund "lumpy" capital works.  The solution, however, lies not with refraining from or eliminating global borrowing limits but with changing the structure, functions and objectives of government agencies.  The real task is to isolate the commercial functions from the non-commercial through, initially, an accelerated and more rigorous process of corporatisation, and, ultimately, through privatisation, and to have all non-commercial activities undertaken by PTEs to be funded by the general government sector.

The general government subsector should be the primary focus of the government's debt strategy and the subsectors --- the PTE and general government -- should be subjected to separate, explicit targets for debt and deficits.  The current debt management plan does neither.

Need To Stop Borrowing For Consumption

For reasons of efficiency and equity as well as straightforward financial management, public sector agencies, in both the PTE and general government subsectors, should be allowed to borrow only to fund additions to net capital stock and not to fund consumption.

The use of borrowing by the public sector to fund consumption will inevitably result in excessive costs, with too much of the State's scarce resources being taken away from productive uses in the private sector for unproductive purposes.  Borrowing for unproductive purposes also undermines the ability of government to manage its finances.  Since interest payments are a non-discretionary item of expenditure, their growth necessarily diminishes the policy options available to governments and exposes government to a higher level of risk from economic factors, such as higher interest rates, and from political factors, such as the domination by the Commonwealth.

The most serious and binding criticism of the use of borrowing for consumption purposes is that it is grossly inequitable.  As the current debt management plan correctly indicates, the main justification in theory for the use of debt to finance public expenditure is that it allows the cost of long-lived assets to be spread over time;  that is, it achieves equity over generations.  Public works do often have long lives and can involve large and lumpy expenditure.  If such assets were financed totally from current revenue, then current consumers would be forced to bear the full cost.  That could, as a result of budget constraints, lead to the under-supply of valuable assets;  whilst future consumers would benefit from the use of the assets but would not be required to pay their fair share.  That intergenerational equity argument, however, has a binding corollary, seldom made clear by governments.  It is this:  that it is not equitable to borrow, unless the borrowings are used to create a new long-lived capital asset and one that earns its keep.  That means that it is not equitable to borrow for recurrent or consumption purposes (including the consumption of capital in the form of repair and maintenance expenditure).  Future generations receive little benefit from the consumption of their predecessors.  They will, moreover, be required to meet the cost of their own consumption as well as that of preceding generations.  This is quite clearly inequitable.

As discussed above, the available evidence indicates that the general government subsector and perhaps the PTE subsector are currently borrowing heavily for non-productive or consumption purposes.  Depending on the accounting treatment, the data show that at least 30 per cent and perhaps as much as 87 per cent of the new net borrowing by general government is currently being used for consumption purposes.  The data on the PTE subsector are less definitive, but do indicate the continued use of new borrowings for non-productive purposes,

The obvious conclusion is that the deficit of the general government subsector should be reduced at the very least by a third -- $120 million -- in 1993.  The deficit of the PTE subsector also needs to be reduced.  By way of contrast, the existing debt management plan envisages steady real growth in borrowing over the term of the government, which, on the basis of all accepted criteria, is excessive.

Need To Compensate For The Legacy Of The 1980s

One reason for adopting a balanced budget target is the need to make up for the excesses of the 1980s.  As discussed above, over the last 15 years and particularly during the last six years, the State's public sector has accumulated a large stock of unproductive debt:  around 34 per cent in total public sector debt and around 60 per cent in the general government subsector.  When unfunded superannuation, unrealised losses in State-owned financial enterprises, and the depletion of the State's mineral and energy assets are considered, there has been a significant erosion of the State's net asset base.  Thus the current generation will be passing on to the next generation a greatly depleted legacy.  This directly conflicts with principles of intergenerational equity, at least as applied to general government assets.

Since there is no direct connexion between individual users and individual funders of general government assets, these assets and any associated debt must be assessed on a whole-of-society or collective basis.  Intergenerational equity will be achieved for such assets if, in a given period, the beneficiaries -- the whole of society -- pay an amount which covers the full cost of the services they receive including maintenance and replacement of assets.  In that way, one period's taxpayers will bequeath to subsequent taxpayers no less an inheritance of net assets (capital and financial assets less liabilities) than the one they received.  The central point is that the whole burden of general government debt must be tied to the benefits which the whole of society will gain in the future from improvements to the current capital stock;  the asset, the debt and the benefits are all indivisible.

Given the indivisible nature of general government assets, the level and uses of past borrowings are relevant to determining the appropriateness of new borrowings.  Specifically, there is no equity in making future taxpayers fund the construction of schools or day-care centres if they -- the future taxpayers -- are also saddled with debt for which they receive no benefits.  If the level of debt is already excessive relative to the asset bases -- as it is now -- it is inappropriate to make future generations pay for new schools even though they may benefit from them.

To make up for the profligacy of the past, the general government subsector will need to maintain a balanced budget.  If capital spending is maintained at current levels, a balanced budget would be required for between 15 to 30 years to compensate for the legacy of the 1980s.  In other words, equity requires a balanced budget in the general government subsector for the foreseeable future.

The excesses of the past are less relevant to the commercial activities of government.  If investment is financed on correct commercial grounds, then each debt-funded addition to the capital stock will automatically be justified by the revenue expected from customers.  As such, the stock of debt held by these agencies, whether productive or unproductive, does not theoretically alter the justification for using debt funding at the margin.

The stock of debt is, however, important for the PTE sector.  Some PTEs, such as SECWA, Fremantle Port Authority, and Westrail, have accumulated a large stock of unproductive or under-performing debt which has to be serviced and which is undermining their efficiency and flexibility.  A large proportion of this debt has been generated for redistributive purposes and funded via tax-like instruments.  This should be viewed as part of the general government sector and thus as adding further support to the need for a balanced budget.

Public Sector Must Cut Its Use of Domestic Savings

Australia's economic conditions demand that the public sector reduce its consumption of private savings by achieving a budget surplus.  Australia has a large current account deficit arising from an excess of domestic expenditure over domestic income.  This deficit is being financed by borrowing the savings of foreigners, who must be repaid with interest.  As a result the foreign debt has grown past $160 billion, and debt-servicing costs have grown to 42 per cent of net exports.  Part of the solution to the debt and current account problem lies in achieving a sustainable increase in domestic savings.  The most effective and only direct means open to governments to achieve an increased level of savings is for it to stop borrowing;  that is, for the public sector to stop consuming private savings.

Since all major parties at the Federal level have, in recognition of the nation's fiscal plight, made explicit commitments to return the budget sector to a surplus, the Commonwealth government will, throughout the term of the new State government, put continuous pressure on the States to cut expenditure and restrain borrowings.  Indeed, as the experience of the latter half of the 1980s shows, unless the States take a lead in the process of fiscal reform, the Commonwealth will not only force restraint on the States via the various instruments at its disposal, but it will also force them to bear the bulk of the restraint and the debt.  Moreover, unless the States prove themselves willing and able to respond to the need to reduce public sector borrowings, the Commonwealth is unlikely to support any changes in State-Federal fiscal arrangements which might give the States more autonomy.

Need To Meet The Competition:  Queensland

The processes of structural change and microeconomic reform will present Western Australia with huge challenges and opportunities in the 1990s.  Western Australia's main competitor is and will continue to be Queensland.  Although the level of taxes and charges is only one of the many means by which the State can compete, they are important and they are within the control of the government.  One way in which the new government can meet the challenges and opportunities provided by reform processes is to achieve the level of fiscal performance and the cost structure of its main competitor – Queensland -- and the most obvious way to do this is to adopt Queensland's unique and successful fiscal stance -- the core of which is a balanced budget.  In other words, the government should follow the lead of the private sector in its drive to become internationally competitive and set as its benchmark the best example of current "best practice" in fiscal performance -- Queensland.

Balanced Budget Is Consistent With Stabilisation

If one assumes that State governments can and will manage their finances so as to stabilise the State's economy, then the budget deficit, and even borrowing for consumption purposes, can be rationalised.  Most of those who would argue the orthodox case for the stabilisation function would go on to argue that a rigid balanced-budget rule would make governments either increase taxes or cut spending in periods of low growth, and cut taxes or increase spending during periods of high growth.  This would lead to large fluctuations in tax rates over time.  That in turn would prove very difficult, if not impossible, to manage politically.  It would accentuate the business cycle;  would increase the level of sovereign risk;  and would, over time, distort the relative allocation of work and leisure.  Taxes should remain stable over time, therefore, even if this results periodically in deficits and surpluses.

The key point is that the stabilisation objective is consistent with the pursuit of a balanced budget target.  The Western Australian general government subsector has a structural deficit:  its deficit is not caused by cyclical or temporary factors.  Balancing the budget by either increasing taxes or by cutting expenditure will result in permanent changes and as such it is consistent with the stabilisation objective.  The conflict between a balanced budget target and the stabilisation objective arises more in terms of the timing of the adjustment process and how rigidly the balanced budget target is enforced once it is reached.

The ability of, and need for, State governments to stabilise their local economies is, as argued earlier, very limited and greatly exaggerated.  The evidence indicates that the State governments, including successive Western Australian governments, have in recent years, with one conspicuous exception, pursued a pro-cyclical fiscal stance and in so doing acted as destabilising forces in the economy.  The one exception has been Queensland.  Queensland governments, unlike their counterparts in other States, kept tax rates constant over the 1980s, saved the windfall receipts that flowed from the asset boom of the 1980s, and used the earnings from the accumulated financial assets to make up the shortfall in tax revenue during the recent recession.  Thus Queensland was the only State to pursue a stabilisation policy, and a key reason for its being able to do so was its pursuit of a structural balanced budget.

Need To Check The Bias Of Politics

The inescapable conclusion we gather from the fiscal behaviour of the Western Australian public sector over the last decade or more is that the traditional conception of government as acting benevolently in the "public interest" to achieve equity, to stabilise the economy, and to promote efficiency, is not applicable to State governments.  On the contrary the evidence suggests a strong systemic tendency for excessive growth of State debt, when assessed against any of these objectives.

There are many possible explanations or theories ⁽⁴⁷⁾ of this behaviour -- behaviour that is by no means unique to Western Australia -- but two appear to be most relevant to the issue of State debt:  fiscal illusion and the political cycle.

There is strong evidence that individual voters seldom make the connexion that borrowing today leads to higher taxes tomorrow.  First, the indirect nature of the Stake tax and revenue systems leads voters to believe that they do not pay State taxes -- someone else does, most notably business.  If voters do not think that they pay taxes today, they are going to be less concerned about taxes tomorrow.  Second, voters are very poorly informed about the level, use and cost of State debt -- the format and inadequacies of the State's accounts, and the complicated nature of the issues involved see to that.  Third, government deficits allow some voters and interest groups to free-load on future generations.

The failure of people to make the connexion between debt and taxes allows vote-maximising governments to gain popularity by giving current consumers and some voters what appears to them to be a free lunch:  spending without any immediate or obvious increase in taxes or charges.

The excessive accumulation of debt is also caused by the short time-horizons of political parties.  Political parties are primarily interested in getting elected and, once in government, in staying in power.  They characteristically have a very short and tightly-focused time horizon -- the next election.  Their primary focus within that horizon is on maximising votes in marginal seats.  They also have a strong incentive to push the responsibility for funding current expenditure as much as possible into the future:  many future taxpayers are not current voters, and the future government is likely to be made up either of a different party or at least of different members.  Voters tend to accommodate the short-sightedness of politicians within their own myopic behaviour.  Electoral outcomes are heavily influenced by the apparent economic performance of and benefits provided by governments on election day.  Both the past and the future are discounted heavily. ⁽⁴⁸⁾  The myopia of the political process combined with the vote-maximising imperatives of government give rise to the electoral cycle in which governments manipulate expenditure for maximum impact at election time and in marginal seats, with large increases in deficit funding.  The electoral cycle has been a very obvious and major reason for the ratchet-like growth of debt in Western Australia over the last decade or more.

The existence of these forces -- fiscal illusion and the political cycle -- does not mean that State debt will grow inexorably;  there are limits.  The Commonwealth, through the Loan Council and the provision of grants, will eventually impose its will when things get out of hand.  (The extent to which the Commonwealth government ignored the Victorian fiscal débâcle is not however, an encouraging experience.)  Credit rating agencies are increasingly active and will eventually react to State fiscal policy by changing a State's credit rating and therefore the cost of its capital.  Taxpayers may flee, as they are currently doing in Victoria, or revolt, as they did in California in the 1980s.  And political ideology and personalities do matter.  Although these limits are many and varied, they are inadequate, often too imprecise and not very durable.  They tend to come into effect when things have got too far out of hand -- after the horse has already bolted -- involving resort to extreme, costly and often one-off solutions.

A substantial part of the longer-term solution lies in improving the accountability of State spending (see Chapter 5) and in improving the transparency of and the State's responsibility for State revenue collections (see Chapter 4).  These reforms are by themselves not enough, and will prove ineffective unless supplemented with limits on borrowing.

The solution lies with imposing limits on borrowing -- a balanced budget target.  This directly addresses the structural excesses of the political system, as well as being easily understood, credible, and having the potential to command wide public support.

DEBT STRATEGY FOR THE NEW GOVERNMENT

The new State government should implement a debt management plan, whose primary targets are to:

• achieve by the end of the term -- 1997 -- a "Triple A" rating, which involves reducing the net debt of the State public sector from 21.1 per cent of GSP in 1992 to around 17.0 per cent of GSP in 1997.  This is much more stringent than the existing debt management plan which, assuming it is enforced each year and the economy grows at a rate of 4.0 per cent per year in real terms, will take around 13 years to reach the same target;
• achieve by the end of the term -- 1997 -- a structurally balanced budget, or zero deficit, in the general government subsector.  This means eliminating a structural deficit of between $250 and $300 million over a four-year period;
• phase out, by 1995, all borrowing in the general government subsector for consumption purposes:  that is, new borrowing must be equal to or less than the increase in capital investment minus the cost of depreciation;
• restrict, from 1994, all new borrowings by the PTE subsector to the funding of long-lived assets that yield a commercial rate of return and are fully serviced by user charges;
• set aside, from 1994, sufficient funds to meet all accruing liabilities above the 1992 level ($4.4 billion);
• take on no additional contingent liabilities in the form of sureties, guarantees and indemnities;
• use the proceeds from asset sales and privatisation to decrease the stock of debt and not to fund consumption;
• channel all capital revenue, including mineral royalties, into capital outlays;  and
• make explicit grants to PTEs for community service obligations.

IMPLEMENTATION:  NEED FOR INSTITUTIONAL SUPPORT

The debt management strategy can only be achieved in a limited number of ways:  by raising more revenue, by cutting expenditure, or by a combination of the two.  These are considered separately in later chapters.  The priority must, however, be to reduce spending.  It is also appropriate to raise additional revenue, in the form of asset sales and privatisation, and to impose for a fixed term a tax or surcharge earmarked for redeeming WA Inc losses (see Chapter 4).

It is not possible or appropriate at this time to provide the detail, or indeed much more than the overall direction, of the necessary process of adjustment.  There is insufficient information and there are numerous options that will need be considered.  The options should be explored by the Commission of Audit.  Notwithstanding the findings of the Commission, some flexibility will be required over the term of government.  The task at this point is to set the debt targets and to commit the government to achieving them over its term.

Necessary Supports To Balancing the Budget

The main impediment to the debt management strategy will be the political system itself.  Under the existing system, the politicians making up the government will have the usual strong incentives to avoid anti-deficit actions.  Deficit reduction will be strongly resisted by an army of vested interests.  And the politicians of the opposition parties will accentuate the pain -- real or imagined -- without mentioning the gain.  Even those voters who strongly oppose deficit spending will prefer that someone else's programmes get cut, or that someone else's taxes get raised.  Many, though not all, sections of the bureaucracy will see it as an attack on the empire.  In addition to the obvious considerations, many members of the government will see it as bad politics to hand over a nest egg to future governments.  Thus even when political leaders have the best of intentions and have a mandate to reduce the deficit, achieving and maintaining it may be difficult.

The first and most important ingredient toward implementing the debt strategy is political will and leadership.  Unless these are provided over the term of government, the debt strategy could turn into a farce.  Thus it must have the full and binding endorsement of the government.  And there must be some mechanisms, such as a Cabinet decision and a very clear, mandated public manifesto, which fully enunciate the strategy and ensure that someone in authority, preferably the Treasurer, has the power to make it work.

In addition to having a meaningful set of goals and the authority to back these up, there must also be the technical and institutional systems in place to produce the results.  The budget must be properly defined with all loop-holes closed off.  There must be a detailed set of forward estimates backed up by detailed financial controls to ensure that targets are actually adhered to at the manager level.  Those responsible for the strategy must be answerable to Parliament for the success or otherwise of meeting the targets.  This would be greatly facilitated by an annual progress report by the Auditor-General.  Financial incentives should also be provided to public service managers not just in relation to the performance of their own department but to the achievement of the strategy as a whole.

Ultimately the solution lies in putting into place constraints on the decision-making powers of government.  Such reforms are necessarily external because any internal reform will itself be inherently unstable and therefore less effective.

Two options appear to be most suitable:  a requirement to balance the budget or a requirement that all borrowing by the general government sector be approved for specific purposes and by a referendum.  The two options can be combined with a balanced budget being required unless authorised for specific purposes via a referendum.  There are other variations that can be considered, and the restraint can be imposed via statutory or constitutional means, though the latter would be preferable.  Although external restraint on the powers of government may appear to be radical to Australians, it is the norm at the State level in the USA.  Forty-nine of the fifty State governments in USA have balanced budget requirements;  in most (42 states) the requirement is imposed constitutionally.  And unlike the poor track record of similar requirements at the national level in the USA, the balanced budget requirements at the State level have proved to be quite successful in restraining growth in debt and to be popular. ⁽⁴⁹⁾

There is a wide range of issues that need exploration, such as whether the requirement applies over a single year or a period of years;  how the budget is defined;  and how the role and impact of the Commonwealth on State revenue and spending can be treated.  The various options and issues need a thorough assessment, and should be carried out as a high priority by the next government.

---

ENDNOTES

11.  There are numerous ways of measuring State debt.  It can be measured before (gross) or after (net) deducting financial assets;  it can be valued at face or present value;  and the different measures can result in significantly different estimates.  There is little consistency between the various published measurements of State debt across Australia, though the States have agreed to publish estimates of debt on a standard basis (present value) beginning in 1994.  Since the WA government has only published data on gross debt at face value prior to 1989, this measurement will be used throughout this study.  Estimates on present value basis of gross and net debt are published, but only after 1989.

12.  This is shown by the need for the WA government to borrow $529 million in 1992 to enhance the liquidity of its cash balances in order to meet the liquidity ratio guidelines set by the credit rating agencies.  WA Treasury (1992a), Analytical Information In Support of the Treasurer's Annual Statement:  1991-92, November, page 46.

13.  In this and subsequent chapters, reference to a year implies reference to a fiscal year;  for example, "1982" refers to fiscal year 1981-82.

14.  State debt was higher during the 1960s and earlier decades than in the 1980s.  However, the WA economy and the State's finances have changed to such an extent that the debt levels in the years prior to the 1970s are now no longer relevant.  For example, prior to the 1970s, borrowings were undertaken by the Commonwealth on behalf of the States with significant Commonwealth control over the level of borrowings.  Moreover the cost of debt was much lower during, and in fact at times even negative in real terms prior to, the 1970s.  In the 1960s WA went through a phase of rapid expansion, with the development of the iron ore industry and wheat belt requiring a much higher level of physical infrastructure;  during the 1960s over 47 per cent of total State expenditure was used for capital purposes compared with just 17 per cent during the 1980s.

15.  The State public sector is, under the National Accounting framework (the accounting framework that will be used throughout Reform and Recovery) divided into public trading enterprises, or PTEs, and general government enterprises.  (For a discussion of the National Account format, see WA Treasury (1992b), 1992-93 WA Budget:  Economic and Financial Overview, Appendix 2, pages 43-47;  and for a discussion of its application to State debt, see WA Treasury (1992a), op. cit., Appendix, pages 59-67.) State owned financial trading enterprises (FTEs), such as the R&I Bank and the SGIC, are not included as part of the public sector, though they do transact with the public sector via the payment of dividends and the receipt and repayment of advances.  PTEs are by definition those agencies of government which mainly sell goods into a market with the intention of recovering all or a significant proportion of their operating costs.  (See ABS, Cat. No. 21217.0, Classifications Manual for Government Finance Statistics:  Australia 1984, page 5.) This means that they face a degree of commercial pressure in terms of their financing decisions and have the capacity to service debt via user charges.  In contrast, the general government subsector consists of those agencies of government which in the main operate outside the normal market mechanism, provide goods free of charge, and whose debt is financed by tax revenue.  There is, therefore, a prima-facie case for assessing the financing decision of these subsectors differently.  However, the differences between the subsectors -- in the past and today -- are to some extent more apparent than real.

16.  WA Treasury (1992c), The Treasurer's Annual Statements 1991-92, November, pages 122-123.  WA Treasury (1992d), Submission to The Public Accounts and Expenditure Review Committee State Debt Inquiry, June.

17.  "Report on State Debt", Report No. 25, Public Accounts and Expenditure Review Committee, Legislative Assembly of Western Australia, December 1992.

18.  The Industry Commission defines community service obligations (CSOs) as arising when a government requires a public enterprise to carry out activities relating to outputs or inputs which it would not elect to do on a strictly commercial basis, or which it would only do commercially at higher prices.

19.  See WA Treasury (1992b), op. cit., Table 5, page 60 for a list of major CSOs currently identified by various PTEs.

20.  See ABS Cat. No. 5501.0.

21.  WA Treasury (1992e), 1992-93 WA General Loan and Capital Works Fund, Estimates of Expenditure.

22.  See WA Treasury (1992b), op. cit., pages 49-66, for discussion of reform initiatives currently under way in WA.

23.  These institutions are not treated as part of the budget sector for statistical purposes and thus their losses only affect State debt when met by State borrowing.

24.  WA Treasury (1992e), op. cit., page 2.

25.  Ibid., pages 29-32.

26.  A portion of WA's above-average level of royalties will be offset by a reduction in Commonwealth Grants.

27.  WA Treasury (1992a), op. cit., pages 7-26.

28.  WA Treasury (1992c), op. cit., pages 123-145.

29.  WA Government (1992a), Investing In Infrastructure:  Guidelines for Private Sector Participation in Public Infrastructure, May,

30.  In 1990, the WA government refinanced a large portion of its long-term debt in order to achieve a reduction in its cost of funds.  The decision incurred transaction costs of $190 million which were brought to book in full in 1991.  The transaction led to the very high interest payments in 1991 and the lower level of interest payments recorded in subsequent years.  Thus, to this extent, the decline in interest payments indicated in Figure 3.2 after 1991 is illusory.

31.  Moody's, Moody's Sovereign Credit Report -- Australian States, New York, February 1992.

32.  WA Treasury forecast economic growth of 4 per cent in real terms during 1992-93;  see WA Treasury (1992b), op. cit., page 23.

33.  Stabilisation is primarily a Commonwealth government responsibility and, given the "leakages" from additional State spending to other States and overseas, State governments have only a limited capacity to influence economic activity in their State through such Keynesian policies.

34.  The States do not publish estimates of State debt on a common basis.  The data referred to in Table 3.5 are estimates provided by S&P Australian Ratings, Monthly Ratings Bulletins, April 1992, and differ from the estimates published by individual States,

35.  Moody's, op. cit., pages 27-28.

36.  Note that the two major agencies use different codes, so that Moody's Aaa is the same as S&P Australian Ratings' AAA.  To avoid confusion we will refer to the top rating as "Triple A".

37.  Ibid., page 26.

38.  NSW Government, 1992-93 NSW Budget, Budget Paper No. 2, pages 9-50.

39.  Loc. cit.

40.  Access Economics, Economic Monitor, Canberra, May 1992

41.  Cf. Ken Willett, Clipping The Wings of Eagles, WA, Perth, Policy Paper No. 22.

42.  Queensland Treasury (1992a), Queensland Economic Review, June Quarter, page 34.

43.  Queensland Government (1992a), Queensland Budget, 1992-93, Budget Paper No. 4, pages 3-5.

44.  CGC, Report on General Revenue Grant Relativities for the States, the Northern Territory and the Australian Capital Territory:  1992 Update, Commonwealth Grants Commission, Canberra, AGE, 1992

45.  ABS Cat. No. 5501.0.

46.  WA Government (1992b), Managing Public Sector Debt, August.

47.  See E.S. Savas, Privatising The Public Sector:  How To Shrink Government, Chatham House, New Jersey, 1982, pages 10-26.

48.  A.D. Hibbs, The American Political Economy:  Macroeconomic and Electoral Politics, Harvard University Press, Boston, 1987, page 714.

49.  See Fiscal Discipline in the Federal System:  National Reform and the Experience of the States, Report A-107, Advisory Commission on Intergovernmental Relations, Washington, July 1987.

Reforming the Political Process

CHAPTER 2

INTRODUCTION:  THE CONTEXT OF REFORM

While it would be fairly generally agreed that the last decade has revealed very serious shortcomings in the processes of government in this State, there is more than a little disagreement about the precise starting-point of the various programmes of reform which have been proposed, either formally or informally.  It is worth our while, therefore, to start with a short analysis -- which we hope is reasonably impartial -- of the prevailing political temper;  not least because such programmes (no matter how ambitious their scope) not initially rooted in some current common political ground will not have much chance of succeeding.

The activities of the Western Australian Royal Commission Into Commercial Activities of Government should have brought the processes of government into the light as never before.  The Royal Commission itself, outside the formal process of hearing and sifting evidence, actively sought public comment on changes to aspects of administrative or decision-making procedures which might be desirable in the public interest.

The Royal Commission brought down two reports late last year:  the first giving its findings on the specific issues of corruption, illegality or impropriety on the matters referred to it;  the second on those desirable changes to the processes of government or administration.  The first report is, in terms of specifics, beyond the scope of this book.  The second is of direct relevance.  (Indeed, an earlier draft of this chapter was submitted to the Royal Commission in response to its call for public comment.)  While some of the second part of the Royal Commission's Report was sensible and useful, it was nevertheless a disappointing document.  The reasons for this judgement will emerge in this chapter;  but it is noted here simply by way of explaining that we believe that the report still leaves ample room for fully-fledged alternatives.

It is, in fact, far from clear how far the events of WA Inc, and the activities of the Royal Commission, have actually succeeded in provoking any very wide or deep debate about the relationship between what has happened and the institutional context in which it happened.  There is not a great deal of evidence either way.  We might, however, consider the following points.

• Despite the recent best efforts of some of the media, most notably The West Australian newspaper, there has been very little continuing discussion and debate on State constitutional issues.  None of these issues emerged as significant at the State election.
• The current constitutional debate at the national level, centred largely on issues of constitutional monarchy and republicanism, has no State content at all.
• Opinion polls, both those published and those undertaken by political parties, appear still not to show any deep concern about the adequacy of political institutions in the context of WA Inc, focusing rather on the wrong-doing of individual political actors, and on the remoteness of government from the concerns of ordinary citizens.
• There is apparent, so far at least, no marked swing away from the major parties to new political movements explicitly offering new constitutional alternatives.  Public and private polls do show very considerable disillusionment with both major parties.  And there does appear to be more support for independents and minor parties;  but this can be fairly plausibly explained by other reasons, not least the continuing internal problems of one of the major parties.  Voters seem for the most part to be resigned to a choice of the lesser of two evils,

None of these factors is unambiguously reliable;  but taken together they offer support for the argument that the public as a whole does not see our present problems as being rooted in our forms and processes of government.  (And to that extent, it must be said that the Royal Commission's basic approach was more than justified.)

This, if true, need not deter us from advocating constitutional change.  Nor need it surprise us.  Australians on the whole do not tend to think naturally in constitutional terms -- except on those rare occasions when they are asked to vote on alterations to the Commonwealth Constitution.  In the State context, it is even less surprising, since very few citizens would be aware that the State had a constitution.  That is understandable in that there is no single document equivalent to the Commonwealth Constitution.  We have a Constitution Act, which offers a threadbare outline of responsible government, a number of subsequent relevant Acts, by proxy the Australian Constitution, the Australia Acts, the Standing Orders of the two chambers, and a number of less formal conventions and practices.  It is difficult to think of these as "a constitution", although in practice they are, and this tends to make debate difficult.

It is well worth trying to come to grips with these issues, particularly the issue of public perceptions.  Clearly there are problems with the processes of government in Western Australia.  But for any such set of problems there is a wide range of possible solutions, ranging from a bit of constitutional good housekeeping to revolution and the guillotine.  Solutions to the present problems have not only to deal with political realities, and with the classic dilemmas identified by liberal democratic theorists, but with intangibles such as legitimacy.  Legitimacy is worth some fairly serious thought.  It is not at all clear that the present political system has suffered a crisis of legitimacy, that it has forfeited its claim to be considered legitimate.  It is arguable that its legitimacy rests at least partly on historical continuity, and it is equally possible that too radical a political reform will itself fail to command legitimacy.  These are intangibles;  but they must carry some weight.

The events of WA Inc taken together comprise a shocking episode of political fraud perpetrated against the State, by means of the systematic abuse of the institutions of government.  That has a cost which is measurable in political terms -- even if only incompletely for the present -- and a cost not easily assessed in terms of the damage done to the standing of the political process.

But that is far from being the only consideration bearing on our examination of government.  Indeed, to a considerable extent, the strong focus on WA Inc has served to divert attention from what may well be in the longer run a greater problem:  the systematic wasting of the State's fiscal resources and standing.  The full extent of this is measured in Chapter 3.  It is also important to note that comparatively little of this fiscal activity actually arose from the activities usually associated with WA Inc;  that it was incurred at a time of rapidly growing tax revenues and tax base;  and that it was incurred for the most part for recurrent rather than capital spending.

This is a problem not addressed by those few commentators and critics who have tried to tackle the problems of WA Inc.  At the very least it must reinforce our concerns for accountability and transparency.  But it must also lead us to further concerns not usually addressed:  the need for strong fiscal rules, the need for better bureaucratic design, and the need for independent public advice -- as well as the more detailed recommendations in the following chapters.

Our preference for a basically Westminster-style government is reinforced by our belief that fiscal responsibility is probably more easily achieved under this sort of government than under one in which executive and legislature are separated.

We need also to give some weight to the consideration that our present constitution is not in itself the only or even the major source of corruption and bad government;  that, in the present context, the events of WA Inc were not the inevitable products of our institutional arrangements.  Those arrangements, after all, served us apparently well, or at least unexceptionably, for quite some time;  and could quite easily do so again.  There is no doubt, in fact, that, given a better-than-average transfusion of honesty, leadership, intelligence and dedication to the public interest, the system could be made to work extremely well, without a single change.  That is, in all realism, too much to hope for;  and constitutional arrangements based on optimism are likely to come to grief all too quickly.

From a slightly different perspective, however, the human element in politics is of concern to us.  One of the questions we do need to ask in looking at WA Inc is how far the various affairs at issue were allowed to start and to continue simply because more than a few members of Parliament were not very good at their job, were sometimes not, indeed, very bright or even energetic.  Perhaps we need to pay as much attention to improving the quality of members as to improving the institutions.  Relevant here, too, is the consideration of what we do about the perceptions of remoteness we mentioned earlier, the feeling of alienation from the institutions of government.

Within the context of the present book, there is the additional consideration that we have a preference for the kind of government identified in the preceding chapter:  that is, one which maximises liberty, democracy, a free market, the rule of law, and limited government,

Putting together responses to this range of considerations requires a certain amount of patience and forbearance.  Taking all things into account, the most rational approach would be one involving two stages.  First, we need to strengthen existing institutions in such a way as to tackle the immediate problems identified by the various events which go to make up WA Inc, and by identified fiscal mismanagement.  We need, second, to suggest ways of building on to those institutions to address what are in the end deeper problems.

PARLIAMENT AND THE EXECUTIVE

To be clear about what changes are then necessary, it is important to be clear about the nature of the defects in the system exposed in the last decade.  In the present context, two things most concern us, things that form a common thread through the whole range of misdeeds:  first, the almost total domination of the executive over the whole of the rest of the system, and, second, the ability of the executive to maintain secrecy and to mislead, almost indefinitely, over matters of compelling public interest.  In the language of Westminster, we are talking about the almost complete failure of accountability, and in both senses:  the failure of the executive to hold itself accountable to the Parliament, and the failure of the Parliament to bring the executive to account.  This, in turn, has serious democratic consequences, in that the possibility of genuine accountability of Parliament to the electorate is almost negligible.

Accountability can be improved by a few relatively simple reforms.  It will remain, however, an abstract virtue unless reforms of whatever kind are based on the firm understanding that accountability in turn can only be based on information.  The prior need is, therefore, transparency in government.  So while structural reform is necessary, it must go hand in hand with procedural reform.

We start by observing (as few seem so far to have done) that the phenomenon of transparency and the process of accountability can and should begin in the executive itself.

The structure of Western Australia's government -- looking first at the cabinet -- is eccentric and ramshackle.  In the last year of the last government, there were effectively 50-odd departments, shared around among 16 ministers.  The Premier, for instance, had, in addition to her Premier's post, the portfolios of Treasury, Public Sector Management, The Family, Aboriginal Affairs, and Multicultural and Ethnic Affairs.  There is very little reason or positive benefit in this kind of arrangement, while the drawbacks are obvious:  confusion of purpose, and expense.  It is a sensible first step, therefore, to reduce the number of departments to match the number of ministers, and at the same time to reduce the number of ministers.  The precise allocation of ministries is properly, however, a political decision depending on political circumstances.  One major change, however, needs to be addressed here.

It has been traditional in Western Australia -- as, historically speaking, for most of the time in most of the States -- for the Premier to be Treasurer.  There have been some slight variations on this theme in recent years, with the introduction of ministers for finance or budget management, for instance;  but this has not much affected the basic principle.  As a first step toward better government we recommend that the offices of Premier and Treasurer be completely severed.  This would leave the Premier to concentrate more on overall policy direction and leadership, a somewhat neglected task in the last decade.  Rather more significantly, it would set up a strong alternative focus of power and advice within cabinet and the government in general.  Much of the worthwhile reform undertaken by the Hawke government between 1984 and 1989 came from the diffusion in advice and interest in Cabinet between Prime Minister, Treasurer and Minister for Finance.  Some of that creative conflict can be duplicated at State level.  Second-guessing and simple bloody-mindedness can, of course, be destructive;  but that is to be weighed against the demonstrable need to break down the Premier's traditional dominance over policy and finance.

This recommendation has a number of further implications, aimed largely at redefining Treasury's role, and at restoring its strength and independence.  (These will be examined in Chapter 5.)  In the present context (and to shift for the moment from the structural to the procedural), one recommendation needs to be made here:  every Cabinet submission must be sent to Treasury before it reaches Cabinet;  when it does get there, it must have a Treasury assessment attached.  (It may be that the Premier's department may also wish to participate in the assessment process, particularly in those cases where the original submission comes from Treasury itself.  But this is a less pressing requirement, and need not concern us as greatly.)

From this recommendation, another follows:  no decision on any Cabinet submission should be made until at least two weeks after its first being submitted.  This is necessary to avoid the all-too-common situation wherein busy ministers receive lengthy and complex (or short and deceptive) submissions from their colleagues the night before or even the morning on which Cabinet meets, with no reasonable chance of proper and sober consideration.  Cabinet should, of course, retain the ability to suspend its own rules to deal with genuine emergencies;  but Ministers should make sure that they are genuine emergencies, of the flood, fire and famine variety.

The Department of the Premier should retain the responsibility for servicing the Cabinet.  It should also publish in its annual report figures on the flow of submissions, so that it can be seen whether or not the rules are being followed.

These few changes are important in that individual members of Cabinet will be less able to wash their hands of collective Cabinet decisions;  being better informed, they will be less able to escape the onus of participating seriously in Cabinet discussion and decision-making.

There is little need here to lay down any very particular rules for the administration of Cabinet.  The Premier should, for obvious reasons of good government, try to reassert sound principles of collective Cabinet responsibility, and our suggestions will make that easier.  (Much of the administrative detail could profitably be lifted from New South Wales.)  A further helpful suggestion would be to insist that Cabinet set aside regular meetings -- one a month should be adequate -- to discuss policy and policy directions only.

The customary fate of Cabinet submissions after Cabinet approval is to go back to the originating department, where, in close consultation with parliamentary draftsmen, legislation is prepared.  This is occasionally a lengthy process, sometimes abortive:  there may be second thoughts, or a proposal may be difficult to translate into statute.  In most cases, however, a Bill will eventually make its way to the Parliament.

The Bill will be debated, briefly or at length.  It has to be said that debates in the Assembly and Council are too often, for various reasons, unsatisfactory.  The Bill in question may perhaps be part of the end-of-session logjam, in which an accumulation of legislation -- sometimes up to 20 or 30 Bills -- is pushed through, sometimes with the aid of the "guillotine", in the last two or three weeks of the session.  (This is sometimes simply bad management on government's part, sometimes a deliberate ploy to ensure that contentious legislation is not scrutinised.)  Members too often debate only the general subject, airing their homegrown opinions for the sake of an impressive-looking Hansard extract to send to their electorate mailing list.  The committee stage, when the Bill is considered and (sometimes) amended clause by clause, is too often sketchy and unfocused.  This is hardly a recipe for good government.

Members badly need more time and information.

They can, to a limited extent, satisfy the first requirement themselves.  Standing Orders can quite simply be amended to the effect that no Bill should be debated until it has lain on the table of the House for 14 days (days, not sitting days) after its first introduction.  Ministers would then have to improve their own and their departments' time management;  the government's manager of business in each House would also have to improve his or her performance.  (A useful and natural evolution would then be a formal management committee for each chamber.)  It may be thought by those well acquainted with the ways of Parliament that Standing Orders would be too often suspended to avoid this requirement;  if that cynicism is well-grounded, it may well be that the further requirement of a two-thirds majority for suspension be added.

Information is more expensively acquired.  We suggest here two or three means;  unlike most of the recommendations in this book they do involve some increase, not major, in outlays.

1. Members of Parliament in general, and some in particular, need more staff.  (For comparison:  Federal Members and Senators have a minimum of three staff, with the ability to split positions;  there is a considerable further establishment of staff for Ministers and senior members of the Opposition, but this is substantially augmented from both departmental and private sources.)

   The needs of Opposition members are somewhat greater than those of government members, since they lack their degree of access to Ministers' offices and departments.  The Leader of the Opposition needs at least three extra staff at senior level.  The Opposition Leader in the Council also needs more staff, although for somewhat different tasks.  Other less senior Opposition members also need more staff.  But, given that more than a few do not even now make good use of their available resources, we recommend the allocation of extra staff to Opposition Members in the ratio of two positions to each three Members.  In this way Members will have to prove that they can use staff well -- or lose them to their more eager colleagues.  Independent Members who, in theory at least, have no access to Party resources and therefore need most help, should have one similar extra staff position each.  Government backbenchers should have additional staff allocated on the basis of no more than one extra staff position for every two Members.

   These numbers are independent of allocations resting with the Parliament itself -- as, for instance, to chairmen of committees.  These new staff positions for ordinary Members should be adequately salaried, say, at the level of departmental research officers.  To encourage quality and mobility, Members' staff should be excluded from permanency of tenure and the government employees' superannuation scheme:  their superannuation should be fully-funded and portable, as is the case with Federal Parliamentary staff.  (It would be pleasing if some of the establishment costs were met by a substantial reduction in the number of press secretaries, media consultants and PR advisers.  There is, of course, a fine line between ensuring an adequate flow of information to the public and the systematic dissemination of propaganda;  in the last decade it has been vigorously transgressed.)

2. The facilities offered by the Library of the State Parliament should be upgraded, though not massively.  One of the reasons that Federal Members sometimes manage to sound wiser than their State colleagues is that they can call on the considerable resources of the Commonwealth Parliamentary Library to augment their wisdom.  Improvement at the State level need not be very costly.  A positive step -- which would also force Members to become moderately computer literate -- would be for the State Parliament to buy access to the Commonwealth Parliament's statistical data base, including, if possible, a suitable version of the current economic model.  It might also buy access to MICAH -- a very comprehensive media- and journal-accessing programme -- from the same source.  These two initiatives, with three or four additional staff, and taken together with the other two recommendations, may well suffice.

3. We recommend, strongly, the establishment of an Independent Policy Secretariat, separate from the Public Service, and funded out of Parliament's own appropriation.  This need have no more than eight or nine staff, biased toward economists (or, more broadly, policy analysts) with perhaps one lawyer.  The task of the IPS would be to provide an independent assessment, primarily economic, of each measure introduced into Parliament, before debate takes place.  A particular task will be a comprehensive analysis of each year's Budget.  The IPS might be assisted in all this if Treasury provided an economic impact statement, to be appended to each Bill.  Time and increasing skill permitting, it might also provide independent comment on departmental and other annual reports.  Appointment should be made on a bipartisan basis, after consultation with Treasury.  There is no reason why the IPS should not, like the Commonwealth government's Economic Planning Advisory Council (EPAC) be permitted to commission research from external consultants.  All the IPS's advice must be public.

The last sentence of the last paragraph is extremely important.  Many people affected by legislation -- particularly, but not only, businesspeople -- how nothing of a legislative measure until it actually affects them.  They often, even if they do know of a Bill's existence, have no means of effectively expressing reasoned concern or opposition, or even making informed comment.  Our suggestion will, therefore, make it easier not only for Members but also for those outside the Parliamentary process -- not least the media -- to see through the jargon of statute law and the sometimes equally obscuring language of Ministers' second reading speeches.  Plain English drafting might help:  the results of the Commonwealth government's progress in this area can now be seen to a limited extent in the rewritten Social Security Act.

This small measure of enlightenment is not, however, the only improvement we shall suggest to public access to the process -- see our recommendations below concerning citizen-initiated referendums.

Given time, with the leisure to examine legislation properly, and information, with the increased ability to assess the intent and effect of legislation, the potential for Parliament to do its job better is enhanced.  The Parliament can do its job better still with a few more improvements, mostly minor, improvements which should be on any standard agenda for parliamentary reform, and indeed have been for some years.

Question Time should be lengthened from its present half hour to a full hour.  Within that time, limits should be placed on Ministers' answers:  two or three minutes is more than enough, with extension subject to leave of the House.  Genuine supplementary questions, that is, follow-up questions from the same side of the House, should be permitted.  More use should be made of Questions on Notice, particularly for those matters on which large quantities of factual or statistical information are sought.

Private Members' time, that is, the time not devoted to the Government's business, should be increased to at least one day a week.  This would improve the chances of getting Private Members' Bills into an advanced stage of debate, and would enable more genuine airing of grievances.

Over the last few years, the ability of both Houses to form and operate Committees has been exploited with varying degrees of success.  The Public Accounts Committee of the Legislative Assembly has done some useful work recently and should be given every possible encouragement, including such secretariat support as it reasonably may need.  It has to be said, however, that Lower Houses in general, being, for quite legitimate reasons, more overtly partisan and gladiatorial, are not usually very successful at running a great number of Committees.

In the Legislative Council, special-purpose committees have been particularly prominent and have served, perhaps more than any particular short-term political purpose, to reassert an encouraging degree of parliamentary sovereignty.  The Council's main task now must be to ensure that a good system of Standing Committees becomes more firmly established.  In this, it might look more closely at some of the Senate Committees:  the Senate appropriations procedure, and the Regulations and Ordinances Committee, in particular, are well worth closer emulation.  "Regs and Ordinances" serves the indispensable purpose of examining much of the huge body of law outside Acts proper;  they prevent, to a useful degree, both too much and too much bad regulation.  Again, attention must be given to adequate skilled secretariat support.  The Council cannot, of course, duplicate all the various committee functions of the Senate:  its smaller membership precludes that.  But those functions mentioned should be high on its list of committee priorities. ⁽¹⁾

In Chapter 5 we will be recommending the publication in April or May each year of the Forward Estimates for the following fiscal year, in the form used by the government's own expenditure review process.  It would be helpful to the achieving of transparency if at least one parliamentary committee were to discuss the Estimates publicly and to invite public budget submissions.  The public should be able to see the shape of the budget, to understand the constraints, to make reasonable suggestions, and to have the kind of access usually available only to bureaucrats and peak organisations.

Parliament should sit more, or at least as long as is necessary to allow the unhurried and proper consideration of a well-managed legislative programme.  We suggest that the Parliament sit as long as the Government and Opposition agree -- suggestion already current at the Federal level.  Translated to the State level, however, it encounters a constitutional difficulty.  Under the State's Constitution Act, s.3, the power of fixing "...the place and time for holding the first and every other session of the Legislative Council and Legislative Assembly", of proroguing both Assembly and Council, and of dissolving the Assembly, rests with the Governor.  Furthermore, by virtue of the Australia Act 1986, s.7(5), "The advice to Her Majesty in relation to the exercise of the powers and functions in respect of a State shall be tendered by the Premier of the State".

All this effectively puts the power to call and to terminate sittings of the Parliament at the pleasure of the Premier.  Nor is this merely a theoretical reserve power:  it was used by the last government, and in disgraceful circumstances -- when the Premier prorogued the Parliament in January 1991 to halt the activities of two Council Committees.

There is some doubt as to whether the power to prorogue should exist at all these days.  As Odgers remarks, "In its early use, prorogation was a device employed by English monarchs to rid themselves of troublesome Parliaments and unwelcome legislation.  A lost head or two changed all that. ..." ⁽²⁾  This effective transfer of sovereign power from monarch to premier is a historical step backwards which should be seen as an affront to both Parliament and people.

We recommend, in the first place, that the practice be discontinued, by repealing the relevant words of the State Constitution Act.  As a second step, all remaining discretion in the calling of Parliament after an election should be removed by stipulating a "latest possible" commencement date either in the same Act or in the Electoral Act.  Third, the Parliament should not be dissolved prior to a similarly stipulated date before an election except by resolution of both Houses.  Fourth, the Council's and Assembly's committees should be given the explicit capacity to sit in recess as each House wills.

A necessary consequence of the foregoing is that Parliament be in control of its own finances.  An executive committee -- Speaker, President, and the two Clerks -- should be formed to run the Joint House Department, and to decide on an annual budget (which should cover parliamentary officers, members and their staff, committee secretariats, the library, and the IPS).

This recommendation raises two further points, one of practice, one of principle.  First, it is only sensible to acknowledge that parliamentarians do not, on the whole, have a reputation for parsimony in respect of their own remuneration and perquisites.  We recommend, therefore, that the executive committee suggested here should also include the head of Treasury.  If that is not sufficient to induce a sense of fiscal responsibility, it may also be advisable to have Parliament's accounts audited by Treasury.  Second, the point of principle.  It seems to us that there should be a distinction drawn between those parts of the public service which are properly considered "departments of state", and therefore properly answerable to ministers of state, and those which properly answer to the Parliament.  On these grounds, it seem desirable to transfer the office of the Auditor-General to the parliamentary establishment, and in all respects -- appointment and funding in particular.  Similar arrangements should apply to the office of the Ombudsman (now notionally a part of the parliamentary establishment, but, therefore, under the Premier's Department), the parliamentary counsel and draughtsmen, and other similar offices. ⁽³⁾

Most agendas for parliamentary reform make reference to increasing the independence and respect accorded the Presiding Officers.  Rightly so:  an impartial and authoritative presiding officer is essential to the functioning of every legislature.

The usual suggestion is that we follow the Westminster example, whereby the sitting Speaker of the Commons is not opposed in his or her constituency at a general election, and returned unopposed to the speakership after each election.  This is in theory a good idea;  it suffers from the difficulty that no one ever wants the Speaker of the day to be the first to benefit from such a change.  (Westminster practice, in fact, falls short of the theory.)  Considering the standard of some of the Speakers of the House of Representatives in recent years, for instance, the reluctance is understandable.  It suffers, too, from the objection that if the Speaker is unopposed at each election, his constituents may be thought to be disenfranchised.  The theory is still worth consideration, however, and bears repeating here:  to the extent that it puts another curb on the unthinking domination of Parliament by the executive, the point is an important one, and worth some exploration.

A simpler option may be to specify that the election of Speaker requires a two-thirds majority.  This could ensure that the successful candidate had at least the minimum of respect from both sides of the House;  and the requisite horse-trading between major parties would tend to eliminate those whose main qualification for the office was factional favour or the ability to call in debts.  A further simple option would be to elevate the office of Deputy Speaker somewhat, and to institute regular alternation between Speaker and Deputy, ensuring what would effectively be a rotating speakership.  Assuming that the Deputy Speaker regularly comes from the non-majority party, this may have the potential to work well.

There may be other points that could be added to those already mentioned, but the intention that emerges from them should by now be fairly clear.  If our recommendations were adopted, the Parliament would be able to hold the executive to account for its actions.  Less formally, the executive would have to manage its relations with Parliament somewhat better, and adjust to both a more powerful Parliament and to a more informed Parliament.

Reason would suggest another quite worthwhile benefit:  in time, as Members of Parliament acquired power and independence (and skill in using them), the standards both of parliamentary behaviour and of parliamentarians as professionals will improve.  Commentators -- and indeed the general public -- often deplore parliamentary standards.  They need to realise that the standard of entrants into parliamentary life will be raised only if Parliament is a strong and useful institution in which all members have a useful role.

The foregoing programme of reform would truly strengthen the Parliament, and make possible a very considerable degree of accountability.  So far, then, it fits in with orthodox theories of Westminster-style government which have as their central tenet the absolute sovereignty of Parliament.

Events in Western Australia and in the rest of the Commonwealth, however, raise the question as to whether it is any longer enough simply to fortify Parliament and to give it better mechanisms for accountability;  whether, indeed, a more completely sovereign Parliament is a realistic and sufficient answer to the problems revealed.  After all, while the Commonwealth Senate (one of the most autonomous chambers in any "Westminster" system) has steadily improved the quality of Federal legislation, it has not markedly diminished the potential sovereignty of the Federal executive.  And we too often forget that the Western Australian governments between 1983 and 1993 did not control the Legislative Council.

We do well, in fact, to contemplate what night have happened in this State had governments from 1983 to 1993 indeed controlled both Houses;  and equally we should contemplate the life expectancy of true parliamentary sovereignty should any future government, both strong and unprincipled, control both Houses.

In the same way it is necessary for us to contemplate what happens when (as often) government and opposition agree on measures conducive to bad government.

Such considerations lead us into advocating the need to look beyond merely strengthening the Parliament.  We have, simply to avoid too much abstract argument, avoided discussion about where true sovereignty now in fact lies, and, too, where it should lie.  Without directly addressing that question, we will advocate what amounts to a preventive diffusion of sovereignty, which at the same time leads forward to our second stage of institutional -- or constitutional -- reform.

THE PEOPLE

The people of Western Australia have not, on the whole, been well governed over the last decade.  The end result, in tangible terns, is that they are being obliged to pay for a series of quite preventable mistakes which were none of their doing.  That is bad enough.  In some ways, the intangible results are somewhat worse.  There is now, as far as any amount of anecdotal evidence will show, an unparalleled degree of cynicism and antipathy toward politicians and politics.

Cynicism toward politicians is not to be greatly regretted;  indeed we could, on the whole, have done with rather more of it at various times in the 1970s and 1980s.  Provincial charisma has been, after all, a poor substitute for the public interest.

Cynicism toward politics, toward the political process itself, on the other hand, is more regrettable.  It strikes a blow at the heart of the legitimacy that in the end makes government possible.  This will not be fatal if it is indeed (as we have proposed above) directed at the business of politics, rather than at institutions.

A party which was seriously committed to the reforms we have so far suggested might well restore some of the faith lost in the processes of government.  Political enthusiasm, despite repeated disillusionment, is strangely resilient.  We will in this section, however, put forward further reforms which should have the effect of restoring both faith and life in politics.

The first recommendation is an obvious one:  we propose the abolition of compulsory voting.  Compulsion in voting is an unnecessary infringement of freedom:  and failing to register a vote can be as real an expression of political opinion as any other.  In the present climate, in particular, compulsion merely increases cynicism and hostility.  It can be argued, too, that compulsory voting enables the parties to concentrate their resources on fairly small numbers of voters in a small number of seats.  To the extent that this results in policies designed with narrow and selfish interests in mind, it probably works against the wider public interest.  If politicians have to work to get all voters interested enough to consider voting, policies should be broader-based.  It can also be argued that compulsory voting, simply because it muffles popular feelings about politics and politicians, obscures, in an unhelpful way, future developments in democratic politics -- developments, which, for instance, might involve the demise of the traditional groupings of the major parties.

(This is in itself a quite simple reform.  It would, however, follow, that serious consideration be given to the consequences in terms of maintaining the integrity of the electoral roll.  This is not an insuperable difficulty in those countries which already have voluntary voting;  at most, the difficulties would boil down to the necessity of adjusting the election timetable to allow last-minute enrolments.)

Next -- and this should hardly need saying -- it is essential that the franchise for both Houses be as nearly as possible based on an equal weight of individual votes.  No amount of special pleading can counter this.  It is perhaps necessary to point out that the Legislative Council throughout the 1980s, consciously or not, denied itself the independence and legitimacy conspicuously available to the Commonwealth Senate. ⁽⁴⁾  The casualty was good government.

A third relatively simple reform is the introduction of effective legislation for Freedom of Information.  FOI adds considerably to the transparency which we have already spoken of as being the necessary prerequisite for true accountability.  In practice, it is frequently used to best effect by politicians themselves and by investigative journalists;  that in no way lessens its value to the people.  Western Australia's FOI legislation completed its passage through the State's Parliament late last year.  It remains grossly inadequate, and is still in need of very substantial amendment.  The exemptions exclude so much of the State government's operations from scrutiny that the improvements to accountability are probably negligible. ⁽⁵⁾

Our fourth reform is a major one, involving potential change of some magnitude, over time, to the way politics operates in this State.  We propose the adoption of a fully-fledged system of citizen-initiated referendums.  The concept has been argued at length in the Australian context by Professor Geoffrey Walker in his book, The People's Law; ⁽⁶⁾  we need not, therefore, go over the history of the system elsewhere, or, indeed, the administrative arrangements, in any great detail.  Briefly, then, we advocate that the entire range of citizen initiatives be available to the people of Western Australia, namely:

• the legislative veto (that is, the power effectively to repeal any Act of the Parliament, whether ordinary or delegated legislation);
• the legislative initiative (that is, the power to make new law without parliamentary intervention);  and
• the executive recall (that is, the power to remove any elected or appointed official, whether in the Parliament, the Public Service or the judiciary).

The system works so well in other democracies that the detailed design can be appropriated as necessary.  We do recommend, however:

• a regular referendum day, not less than once a year, with a preference for a date late in December to allow fiscal consequences to be considered in the following budget, and the option of holding referendums concurrently with general elections;
• a relatively small number of signatories for the initiating petition, say, 3 per cent of registered voters;
• the simplest possible techniques to verify the genuineness of the petitions (with particular consideration to be given to sampling);
• certification by the parliamentary draftsmen that the wording is acceptable technically;  or access to draftsmen to ensure the best possible wording;
• the option being available to the government of proposing alternative wording (with preferential voting on options as necessary);
• ratification by a simple majority of those voting, except where the effect is to alter the State's constitution, where a two-thirds majority should be required.

The mechanisms necessary to establish CIR are relatively simple to establish in legislative terms;  but it will almost certainly require, in addition to the enabling legislation, amendments to the State's Constitution Act, not least to establish beyond doubt the power of the people to legislate.  The process itself should receive explicit recognition in the same Act, and should be double-entrenched.  (That is, not only should the procedure be entrenched, but the entrenchment section itself should be entrenched.) ⁽⁷⁾

The arguments for and against CIR have been put forward by a number of writers, not least Professor Walker, whose work has already been referred to above.  Against the background of the concerns of the present work, it may be worth singling out some of the probable benefits for particular emphasis.

• We would certainly expect greater accountability, and not only of the executive to the Parliament, as has been our concern so far, but of the Parliament and executive to the people.  After all, there is little point in setting up Parliament as a watchdog over the executive if Parliament itself is not subject to the same sort of discipline.  The old adage of "quis custodiet" applies with some force.  An unbridled Parliament is no better than an unbridled executive.  Without, again, entering into protracted speculation about the ultimate locus of power or sovereignty, we plump for diffused power.
• CIR now represents the only available way (short of much more radical constitutional arrangements than have so far been proposed anywhere in the world) of seeing that the law does actually represent the common interest.  It is all too clear now that, on the whole, the political agenda is set by the influence of narrow interest groups (both overt and covert) on parties bidding for success.  The majority interest, for reasons now well known, is neglected.
• Because of the way CIR works, because of the need to form large majorities around single broad issues, the ability of narrow vested-interest groups to damage economic processes and outcomes is limited.  In time the economic benefits of CIR may indeed be considerable. ⁽⁸⁾
• As with a number of other proposed reforms, CIR should act to restore faith in the political system.  Participation, with the consequent need to weigh issues singly, will improve popular political skills.
• Importantly, CIR does have the effect of unbundling the whole policy process, and in two ways.  It separates politics from personalities, indeed, from the whole collective trivia of elections.  It separates one policy from the whole bundle on which a government is elected.  It would be possible, for instance, to elect a new government, thought on the whole to have good policies, even if one policy were unpopular -- as it might be, the introduction of a goods and services tax.
• CIR should lessen the alienation felt by some voters who live in blue-ribbon seats not of their own political persuasion.  The committed Labor voter resident in Peppermint Grove can hardy feel that his vote is worth casting.  Comparatively, every vote cast under CIR is equal and equally important.
• Whether or not four-year parliamentary terms are desirable is not a question we need to go into here;  it can, however, be argued that CIR is a useful check on both the excesses and the fatigue which may well be inherent in the longer terms.
• CIR de-emphasises the role of parties, particularly as being the only effective access to genuine participation in the political process.  This will be an effective challenge to the party organisations to widen their base, to dean up their image, and to improve their performance.
• CIR need not be resorted to, measure by measure, for its beneficial effects to be felt.  Its very existence has a minatory effect on public officials, who will be wary of actions and measures liable to be reversed.

CIR has been much criticised, though rarely on any very convincing grounds.  It is, for obvious reasons, not very popular among practising politicians, who, on the whole, believe that the people may exercise their collective wisdom only once every three or four years, at election time.  (The irony of this, unsurprisingly, escapes most politicians.)  Fears of popular radicalism, perhaps popular bigotry, may play a more-or-less legitimate role in this opposition;  although that is a little strange in a polity like Australia's, given the level-headed conservatism evident in the history of our constitutional referendums.

One objection, virtually never raised, but entirely valid, is that CIR does have the potential to enhance the tyranny of the majority.  Given that the doctrine of the separation of powers is more or less dead in Australia, and that the tyranny of the executive is (as a consequence) alive and well, this concern may be thought perhaps oversolicitous.  Good liberal democrats should nevertheless take it seriously.

Bearing in mind the dangers inherent in simple majoritarian democracy, our belief is that the natural corollary of CIR is an entrenched code of freedoms, or bill of rights.

This is a matter which has been at times of considerable interest at the Federal level, although comparatively neglected at the level of State jurisdictions. ⁽⁹⁾  The notion is fairly simply dealt with at the State level:  all that is needed is a relatively brief list of basic rights (including only time-tested, "negative" rights), entrenched, and justiciable.  The flaw in the Federal legislation -- large and intrusive administrative bureaucracy -- need not be repeated.

This move would have implications well beyond the original consideration of CIR.  We regard it as a first, important step toward giving Western Australia a real constitution.

The second, logical step would be to add the basic elements of a fiscal constitution;  setting down clearly two or three fundamental rules on such basic matters as limits on taxing and spending, and the relationship between taxes and expenditure in the budget context.  The reasoning behind this, and the necessary steps toward it, are set out in later chapters.

We do not go into the first of these last two points in any great detail, for one quite practical reason:  there is a limit to the amount of change that can reasonably be proposed and digested at any one time.  It is nevertheless a matter of central importance.  Western Australia does, of course, have a constitution, in the sense that we pointed out at the beginning of this chapter.  That is no longer enough.  It is not sufficient any more to define only the institutions of government and their rules of proceeding.  What is necessary -- and this has to be one of the most important lessons we learn from WA Inc -- is a better set of rules, which defines the limits of government, both in size and in function.  One of the greatest of parliamentary theorists, A.V. Dicey wrote in 1885 his Introduction to the Study of the Law of the Constitution.  He envisaged a sovereign parliament working within the rule of law.  Subsequent theory and practice have elevated the first at the expense of the second.  The only way for parliamentary democracy to flourish, to work well, and to maintain its legitimacy, is now to reestablish parliament within the rule of law.

PARTIES AND THE BUSINESS OF POLITICS

Much of the more sensational evidence brought before the Royal Commission has concerned the relationship between political finances and political favours.  The Commission's full report makes it clear that one of the most unpleasant features of the last decade in Western Australian politics has been the extraction of large sums of money from businessmen in return, explicitly or implicitly, for commercial advantage.  Whether any of this amounts to criminal bribery is not for us to determine, of course;  that it did amount to large-scale corruption of the political process is now widely accepted.

It is clear that while unusual circumstances may have been operating in some of the relevant cases that have come to the Commission's attention -- not least an apparently remarkable degree of simple greed -- one of the principal contributing factors to this corruption was the pressure now experienced by parties to fund increasingly expensive election campaigns and to maintain essential parts of the campaign armoury between elections.

Campaigning now much resembles the arms race of the "Cold War":  the weapons get more sophisticated and expensive, with a fairly high degree of obsolescence, and the cost of falling behind is fatal.  So pamphlets and brochures get glossier and more colourful, the advice from marketing and advertising experts becomes more indispensable and costly, and new techniques -- like direct mailing -- become obligatory.  Direct mailing is particularly expensive, since it requires the acquisition and maintenance of a comprehensive and refined database between elections.  And as elections become increasingly close-fought, the advantage increasingly lies with the better database.

Various solutions have been proposed to the various problems raised by this arms race over recent years.  It is safe to say that few of those officially proposed are without a conspicuous degree of self-interest.

One cure now apparently institutionalised at Federal level is public funding.  This is unsatisfactory from most points of view.  It was introduced and operates without any conspicuous public support, and without any satisfactory philosophical basis in political theory.  It clearly disadvantages small and new parties, who cannot count the funding in their contingency budgets, as do the major established parties.  And it simply provides those major parties with a funding base on which to build ever bigger fundraising efforts.  It is difficult to see how public funding could be made to achieve its object without unacceptably draconian limits on campaign expenditure itself.  Other measures of campaign restraint, most particularly the ban on electronic advertising, have been introduced at the Federal level:  they were introduced in a spirit of naked cynicism, and involved unacceptable restraints on important liberties.  The ban was, of course, overturned by the High Court, in an important judgment bearing directly on freedom of speech

The overall solution to these problems is far from easy to find.  On the one hand, there is undoubtedly strong opinion in favour of universal public disclosure both of political donations and of politicians' own financial interests.  On the other, it has to be recognised (though this is in fact seldom publicly argued) that an individual's financial support for a political organisation is, more often than not, an expression of political opinion which should remain private, as private as is the secret ballot,

This last is a point worth some serious deliberation, the more so since it has to a large extent been overlooked in recent debate at both State and Federal level.  There are visible practical consequences:  people can, even in Australia, be persecuted for their political beliefs.  There can be no doubt, for instance, that one of the episodes within the Royal Commission's terms of reference arose simply out of a desire to disadvantage one businessman clearly identified as a prominent supporter of the then Opposition.

One practical factor to be taken into the balance here is the difficulty of writing disclosure laws without loopholes.  The Federal legislation applying between 1984 and 1991 is worth examining in this respect.  The distinction between campaign funds and party maintenance funds was a loophole through which one could drive a truck, or at least a Porsche.  Campaigns officials were not required to account separately for individual donations at "fundraising events", enabling quite large sums to be dispersed and concealed as takings from cocktail parties, quiz-nights or sausage-sizzles.  Donations in kind (which might include stationery, computer access, postage or printing) are extremely difficult to track down.  As with the Federal income tax legislation, greater strictness led merely to more sophisticated evasion.  Moreover, the decisions so far made in courts following prosecution may seem to indicate that ignorance in good faith is an easy defence.

That together with our concern at the infringement of a basic freedom leads us, not without a few misgivings, to recommend against the current trend toward disclosure of political donations.  The State legislation is now in place, and to that extent our concerns are irrelevant.  At the very least, however, when the matter comes up again -- as it is sure to -- there should be room for a dissenting view.

Our preferred alternative to disclosure is to offer solutions to the separate manifestations of corruption.

We start by making the obvious but neglected point that the more government is involved in (rather than simply with) business, the more corruption is possible.  It has simply been too easy to avoid accountability by pleading commercial confidentiality, or by removing entities involved in or with business from even the rudimentary scrutiny of the usual budget process.  This leads to the conclusion that for this reason (and others addressed elsewhere) government should as a matter of principle be as little involved in business as possible.  (And following from this it is important that, as the Royal Commission has noted, "All public sector bodies, programmes and activities involving any use of public resources, be the subject of audit by the Auditor-General" -- Part II, Recommendation 9.)

Further, the evidence before the Royal Commission leads to a more particular and practical observation.  It is clear that in most, if not all, of the commercial activities under investigation, an extraordinary degree of executive discretion was employed to avoid recourse to accepted standards of public tendering, whether for purchase or for sale of property, goods and services (including, in the latter case, advisory and consultancy services).  Much happened at the State level which could not, for instance, at the Commonwealth.  We therefore recommend a thorough overhaul of the laws and procedures covering the process of tender, with statutory provision for parliamentary scrutiny and adequate public access through Freedom of Information.

There are, of course, many kinds of corruption.  We have seen, for instance, executive interference in the accepted process of legal prosecution.  This requires serious consideration, certainly;  but it can be observed here that the possibility of executive recall through citizen-initiated referendum would be a strong precautionary discipline on politicians in such Instances.

There is already some interest in other State legislatures in the development and promotion of codes of conduct for politicians.  This is something worth working on, even if it does provoke reflections of a gloomy kind about the way it symbolises the decay of personal codes of ethics.  It is doubtful, however, that statutory or quasi-statutory codes will do much good.  They will tend to be pitched at a fairly low level, to lack teeth, and to become dead letters.  A better idea is the promotion of voluntary codes, developed by politicians themselves;  codes which would encourage politicians to compete among themselves for better definition, and better observance, of self-regulating political ethics.  A matching development of voluntary codes governing party business, promoted by the state presidents of the parties, would help the process -- and may help the parties to recover some of their credibility.

We have already spoken of the corruption arising out of direct involvement with business.  What is usually less apparent -- and obscured by the very notoriety surrounding some of the more spectacular malfeasances -- is the virtually unlimited potential for corruption that exists by reason of the power available to all governments to affect all stages in the life of a business.  Zoning and planning permission, release of Crown lands, licensing of industrial activities, access to naturally-occurring resources, environmental approval, subsidy by grant or loan or tax preference, deals on union coverage, agreements on occupational health and safety issues, licensing and surveillance of polluting activities, preferential access to water or gas or electricity, royalty arrangements outside the normal tax regime, implicit taxation in the use of transport networks, subsidy or implicit taxation in the provision of infrastructure, licensing of occupations and professions -- the list could be extended indefinitely.  No businessman and, indeed, no citizen of working age, is uncaught by some aspect of this net of power.

Some of those concerned will tolerate the regime, and do their best to operate under it as honestly as they can -- even to the point of going down under the weight.  Others will, inevitably, turn some of their entrepreneurial abilities to evasion or avoidance, or to the negotiation of deals, overt or covert, with government itself.  However legal and public these may be, they are all, in the end, corrupting;  corrupting, most particularly, to the rule of law.

Aside from all economic considerations (even if they could be separated) -- the existence of this power is one of the best reasons for a comprehensive programme of deregulation, and the withdrawal of government from many areas best left to the operation of a free market.

AFTERWORD

It is only right to end this chapter on a note of realism

Parliamentary reform has a chequered and not very inspiring history in Australia.  The Senate committee system, largely put in place 20 years ago, is an encouragement to advocates of reform.  But against that we might for instance count the calculated failure of an embryonic committee system in the House of Representatives ten years later.  Again, on the positive side, we should acknowledge recent reform in New South Wales, and, too, some of the changes over the last year or so in our Legislative Council.

Looking at those and other similar examples, we might well draw the conclusion that it is, these days, too much to expect that parliamentary reform will arise out of purely virtuous intentions.  That need not worry us greatly.  It is to be expected that even in politics self-interest will sometimes produce beneficial public effects.  Hence our comments earlier on the probability that reform may well be an attractive policy for governments and oppositions to pursue.  It does seem to us that parliamentary reform should be a major plank in the platform of any party sensible enough to see that good government is good politics.  Indeed, without that self-interested impetus, the prospects for adequate reform seem fairly poor.  There is, to be fair, a number of individuals already in Parliament who have a genuine interest in the matter;  but they have neither the numbers nor the weight of influence to achieve much.

In the same vein of realism it is worth saying that reform will not achieve much without a change in attitude.  Both ministers and members must be made to understand that they are the servants of the people, and that the common good always comes before partisan and private interest.  Changes in attitude cannot be achieved by waving a magician's wand.  The press have significant potential power in this.  But perhaps this is where CIR would be most effective:  it gives politicians the explicit choice between serving well and not, between being trusted and not. ⁽¹⁰⁾

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ENDNOTES

1.  The Royal Commission implicitly recommends that as the Legislative Council becomes a single-purpose "House of Review" it should lose the power to block supply -- see paragraph 5.3.12 of Part II of its Report.  The suggestion leaves all sorts of questions unanswered -- what becomes of Council ministers?  Who handles legislation?  What conceptions of "responsible government" are implied? and so on.  It encounters one objection which most observers of Western Australian and Queensland government over the past decade should find a fatal one:  a Council without power over supply would be gutted and powerless, and would quite quickly be reduced to a cipher.

2.  J.R. Odgers, Australian Senate Practice, fifth edition, Canberra, AGPS, 1976, page 621.

3.  The Royal Commission, in adopting this notion, has also included the Electoral Commissioner, which is sensible -- see its Recommendation 31 (a) in Part II.

4.  The Senate franchise is not, of course, equal, in that each State, large or small, has the same number of Senators.  Its perceived legitimacy of franchise rests roughly equally on its Constitutional mandate and the fairness of the electoral process, which tends to give remarkable accuracy of proportion.  The Council shares neither of these attributes.

5.  The Royal Commission addresses the matter of FOI at some length in Chapter 2 of Part II of its Report.  The points made there are well made, but do not go far enough.  Their further thoughts on the conflict between FO1 and statutory secrecy, on the other hand, are much to the paint, and should be included in any agenda for reform.  "Whistleblower" legislation is probably worth having, but it is by no means as significant as some of its proponents suggest.

6.  G. de Q. Walker, Initiative and Referendum:  The People's Law, Sydney, Centre for Independent Studies, 1987.

7.  See R.D. Lumb, The Constitutions of the Australian States, Brisbane, University of Queensland Press, 1972, page 104,

8.  See the paper by Franz Lehner, "Pressure Politics and Economic Growth:  Olson's Theory and the Swiss Experience", in Dennis Mueller (ed.), The Political Economy of Growth, Yale, 1983, pages 203-214.

9.  See, however, the article by Mark Allan Gray, "A Victorian bill of rights:  judicial review and other issues", The Australian Quarterly, Autumn 1991, pages 74-90.

10.  Perhaps one further general remark on the Royal Commission's Part II is in order.  Some commentators have already suggested that the Commission's determination to adhere religiously to its terms of reference resulted in a series of unnecessarily timid recommendations.  That is true, and the recommendations are characterised as well by an unwillingness to go beyond currently fashionable academic political theory.  Perhaps the most significant failing, however, is the deferral of same matters for the consideration of a Commission on Government.  To do that was immediately to lose an already failing impetus to reform.  One opportunity, one very big opportunity, has now been lost.

Introduction

ACKNOWLEDGEMENTS

The support of the following organisations is gratefully acknowledged.  The publication of this book has been made possible by their generosity.

ANZ Banking Group Ltd
Argyle Diamonds
Chamber of Commerce and Industry of WA
Business Research & Development Fund
Hadson Energy Ltd
Hancock Prospecting Pty Ltd
Hartley Poynton Ltd
Hospital Benefit Fund of WA
M.G.  Kailis Group of Companies
Voyager Enterprises Ltd
Wesfarmers Limited

Their support for this project does not imply that they agree with the arguments it contains.

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CHAPTER 1

The aim of this book is simple:  it sets out to provide a policy manual for government in Western Australia.  It is, in this respect, much like Mandate to Govern, published in 1987, and Project Victoria, published last year.

The book falls naturally into two parts.  In the first, we look at the two overriding areas of concern:  the processes of government, and then government economic activity in its three main aspects -- debt, taxation, and expenditure.  In the second part, we look more closely at individual policy areas, some in considerable detail.  This second part is not exhaustive;  space and resources have imposed limits.  But where possible, we have alluded to other starting points for policy analysis (as, for instance, in describing approaches to the reform of public trading enterprises).  And some of the gaps will be filled by our subsequent studies.  It is worth saying, too, that we have not adopted a "razor-gang" approach in any policy area.  While we believe that, in general, governments in Western Australia have undertaken too many activities and have performed with less than ideal efficiency, Western Australia is not facing the sort of fiscal crises all too evident in Victoria, and can afford (though not for too long) the luxury of approaching reform from the basis of fundamental policy analysis without the huge pressure to retrench faced by Victorians.

Like Mandate to Govern and Project Victoria, this is essentially a practical document, offering workable solutions to what have often become unworkable situations.  But given the very wide range of government functions, even in a relatively small polity like Western Australia's, it will not be practicable to argue every case from alpha to omega.  In this explanatory chapter, therefore, we will set out the minimum principles on which our judgements and recommendations in the following sections will be based.  (As far as possible, nevertheless, each chapter that follows stands on its own and can be read in isolation as a policy response to each set of conditions described.)

We can approach the basic principles in two ways -- although they can lead to much the same end.

In the first approach, we can look at the problem as it faces the new government on the first Monday after their victory in the 1993 election:  the election is over, where do they go from there?

The ministers might usefully think of their new government in exactly the same way as a new board of directors which has just successfully completed a takeover of an unsuccessful company.  The board sits down with its new management, and, inevitably, some of the old senior management who have survived, and takes a long look at what the company has to do to prosper -- and to satisfy the shareholders.  They have to decide what activities the new company has done well in, and can continue to do well in;  how those can be done better;  what the "core activities" will be;  what activities to get out of;  what bits of the company to dose down;  what bits can be sold off;  what bits simply to terminate.  This is really starting from scratch -- in government terms, we might call it "zero-based programming".

Zero-based programming is, in fact, exactly what every government should undertake early in its life -- a theoretical ideal, like zero-based budgeting in the annual budget cycle.  The problem is that no government ever really does it.  (To a certain extent, the idea is catching on:  a number of new State governments have started their term with an "audit" study of government functions -- a course we recommend and which is now being followed here.)  The reasons for not starting from scratch in this way are not hard to find.  Government is, by its very nature in practice, incremental.  New functions, new ways of doing things, are simply added to the old;  new programmes are added to the old (social security and labour market programmes are classic examples).  Because politicians come and go, while the bureaucracy lasts for ever, there is an imbalance of information and skills.  No new government ever knows exactly what is done, or who does what;  and bureaucrats have a natural interest in preserving their near-monopoly on the supply of information.

All too often, by the time even the most determined ministers have mastered their portfolio content and perfected their management skills, the next election is upon them.  This is, as it happens, not an immutable fact of life.  Despite variations in the trend from one government to another, there is a gradual trend to better information.  Even the programme statements contained in recent Western Australian budget papers are a considerable improvement on past practice.  They do make possible a basic review of at least broad functions in the starting-from-scratch method we have been talking about.

How would this new government, our new board of directors, go about its task?  It could start by applying a simple set of tests to each function or activity of government progressively uncovered.  This could be expressed in a series of logical questions, which might look like this.

• Is this an activity that needs undertaking at all?  Is it, in some general but real way, "in the public interest"?
• If it is, is it something in which government has a necessary and legitimate interest?
• If so, is it something that government should provide, or should government merely oversee its provision -- by funding other providers or consumers, by enforcing standards, or by compulsion?
• If it is an area for government provision, then which is the most appropriate level of government to provide?  And what is the most efficient way of providing?

Even a set of quite simple tests like this will, if asked rigorously, yield answers which are, by traditional Australian standards, quite surprising.  For hundreds of years, for instance, the provision of services in justice -- from arrest to imprisonment -- has been assumed to be a matter entirely for government.  Quite suddenly, that assumption has broken down:  we have, on the one hand, an embryonic and growing system of "alternative dispute resolution" which is in effect a system of privatised justice, and, on the other, a move to privatised gaols, already a reality in Queensland and New South Wales.

This is, then a useful way of approaching the question of the role of government.  But it is, at best, of limited use.  It depends too much on assumptions which are all too easily exempt from question.  Too often, in fact, it will break down at precisely the wrong point:  at the third question.  Too often the assumption will be that if a service is deemed to be in the public interest then it must be provided by government.  Education, housing and health are perhaps the most obvious examples of this:  since it is widely accepted that citizens should have an entitlement to certain basic levels of education, shelter and health care, most policy-makers then, sometimes knowingly but usually not, go on to operate on the further assumption that government must itself directly provide the service in question.  At best we finish up with the patchy and half-hearted version of economic rationalism, driven by budgetary difficulties, which has characterised much Australian government over the last decade;  at worst, government characterised by incrementalism and defence of the status quo.  Something more rigorous is needed.

Our second approach to the problem of defining the scope and limits of government, then, is to look more closely at the very rationale of government itself, and at the values which underlie it.  This can, of course, proceed by assertion.  It is easy to say that one believes in liberty or equality or a free market or social justice or divine providence.  The preferences of the present document are indeed for liberty, democracy, a free market, the rule of law, and limited government.  Insofar as those, like any other similar preferences, depend on no more than enthusiasm and the lessons of history, they also lack rigour.  (The reader who thinks that the simple statement of preferences is enough, however, may now skip to the next chapter.)  Something more defensible can be offered.  It, too, will involve some assumptions, though not as many.

Perhaps the simplest and least contentious assumptions arise if we consider government as a means of public or collective choice.

The best rationale for a limited government is that to the extent that collective choice, or decision-making, is limited, individual choice or decision-making is increased.

This is almost self-evident, and applies to all areas of government;  it assumes little more than that individual choice is in itself valuable, and that collective choice will rarely if ever be unanimous.  The consequences can perhaps be most immediately seen in the area of fiscal decision-making.  Collective choices which involve collective expenditure necessarily involve the taxation of individuals.  That has a number of implications:  the collective choice will be unlikely to reflect the choices of all individuals within the given area of decision;  but also the collective choice within one given area will diminish the resources available to the individual to make choices within the same and other areas.

All individuals, to different degrees, tolerate some violation of the realm of their individual choice by the force of collective choice.  Although there are very good arguments for limiting strictly the extent of that violation, what is of equal concern to us here is what arises when we pursue, in a reasonable or commonsense fashion, the consequences of collective choice in operation.  It may be useful to bear in mind that we are talking in generalities, not proposing iron laws of political or human behaviour.

In the making of any given decision, some choices will be very wrong, some very right, and a lot will not be of much consequence, right or wrong, at all.  A major problem with collective choice is that the costs of wrong decisions fall on all individuals, including those whose individual choices in the given matter might have been different.  Individuals, on the other hand, for the most part bear the costs of their own individual wrong decisions.  Because of that, individuals can, further, learn from both wrong and right decisions;  whereas those who make collective decisions -- governments -- for the most part do not.  Individuals, importantly, operate within and with the market, responding to market signals in all their infinite complexity.  The market in this sense is not only the sum of all the information about economic activity, but the most efficient way we have of transmitting that information.

To complicate matters, the cost to each individual of a wrong collective decision is often so low as to be insignificant compared with the cost of rectifying the decision or preventing a recurrence.  The same consideration of cost applies in other more important areas.  While individuals see quite clearly the cost of deciding as individuals to purchase any given good or service, the cost to the individual of any individual share of a collectively provided good or service is far from clear.  It may be literally incalculable, not least for want of adequate information, particularly about the nature of the inevitable cost/benefit trade-off.  Or the cost may be so apparently slight that the incentive to refuse the benefit, to seek change or to prevent its provision is again extremely small.

The dispersal of cost also operates so as to influence the setting of the public policy agenda -- the decisions on which items actually come forward for collective choice.  Representative government works in such a way as to ensure that preference will often go to items which are the concern (for economic or non-economic reasons) of small groups of individuals for whom the cost of organisation is outweighed by the expected benefits.  The broad issues, of interest to much larger numbers of individuals, will tend, on the other hand, to be the concern of no one.

In choosing their representatives -- that is, in the election process -- individuals are given a choice between two or three huge bundles of policies.  The policies will be a mix of those which appeal to broad sections of voters and those designed to attract small interest groups.  The costs may or may not be identified and separated.  Given the problem of information here, the rational voter will vote according to identifiable interest.  No voter, rational or not, has the ability to unbundle the policies;  and it will be in the interests of both politicians and bureaucrats to prevent unbundling.

The problem of information offers another relevant distinction.  In making decisions, individuals will never have access to perfect information, but the information available is likely most of the time to correspond reasonably well to the scale of the decision.  Collective choices, government decisions, on the other hand, being significantly greater in scope, will tend to be made on the basis of necessarily inadequate information, and stand a significantly higher chance of being wrong.  And since neither bureaucrats nor politicians ever possess full price information, collective decision-making by political processes is likely at best to be inefficient.

Further, in transactions between individuals, it is in their mutual interest to work within a framework of rules, formal and informal;  rules which specify or imply important features such as enforceability and predictability.  This, importantly, improves the ability of individuals to make decisions about quite distant futures.  Governments, on the other hand, come to prefer an absence of rules (or an unmanageable accumulation of conflicting rules, which amounts to the same thing) so as to increase their apparent effectiveness.  While not binding themselves, they tend to wish to bind individuals by compulsion.  This affects not only the ability of individuals to make individual decisions in which government is a factor, but necessarily affects the operation of rules between individuals in other matters.

Finally it must be noted that the self-interest of individuals, operating under any reasonable set of mutually-agreed rules, is constrained simply by scale in terms of its possible harmful effects on other individuals.  Self-interest expressed through collective choice, on the other hand, is virtually unconstrained in its capacity for harm.  Conversely, the most visible beneficial effect of the operation of individual self-interest under these conditions is the creation of wealth;  while the self-interest of the collective is satisfied in other ways, ways which, except in certain limited circumstances (such as the creation of beneficial rules), do not create or increase collective or individual wealth.  In particular, the self-interest of politicians and bureaucrats will tend toward goals such as re-election, power and tenure.  These are usually achieved through exploiting the deficiencies of the collective political process.

"Harmful effects" can be taken to include other less obvious matters.  The ability of one individual in pursuit of self-interest, for instance, to do harm by denying choice to other individuals in pursuit of their self-interest is necessarily limited even when mutually-agreed rules are relatively weak.  The collective ability to deny choice, to restrict areas of choice, particularly by the establishment of monopolies of all kinds, is more or less unlimited -- as is the capacity for consequent harm.

None of this implies any substantive difference in nature between humans acting as individuals and humans acting as part of the collective (whether merely as voters or as members of the collective's decision-making apparatus -- that is, politicians or bureaucrats).  The problem is precisely that individuals behave in much the same manner, for much the same reasons, in both roles.

This minimal explanation is useful in a number of ways.  It justifies, rather than merely asserts, the values mentioned above as underlying the approaches to government which follow.  It also makes clear the connexion between those values;  it shows, for instance, that there is no necessary distinction between "economic freedoms" and others.  Perhaps more usefully, in the present context, it can be used to show why there is an inbuilt tendency in government to expand indefinitely (especially through the provision of goods and services), why this is harmful, and why there is little incentive and little ability an the part of individuals to prevent that expansion,

The preferred values given above -- liberty, democracy, the free market, the rule of law, and limited government -- can now be expressed as simple guides to recommended change.

We will, in short, recommend changes which:

• increase the extent and number of areas of individual choice, in both private and economic life;
• reduce government activity in areas best undertaken by the private sector;
• restrict government monopoly power to natural monopolies, and allow natural monopolies to be defined by competition;
• remove private sector monopolies established by government;
• limit the scope for government to make large-scale mistakes;
• increase the quantity and quality of information about government activities available to voters;
• establish as clearly as possible for individuals the precise relationship between the cost and benefit of government-provided goods and services;
• limit the ability of government to disguise or defer the cost of provision through financing by debt rather than by taxation;
• increase the resources, and the areas of individual choice, remaining to individuals, to improve their ability to provide for themselves and to pursue their own goals;
• clarify and improve the rules which define government's own internal workings, both in the parliament and in the public service;  and
• establish means of allowing individuals to make collective choices without going through the self-interested processes of politics;

Taken together this list would represent a radical reordering of government activity if put into practice within a short time, say, for instance, one term of government.  That clearly is not a practical possibility.  It should represent, therefore, not only the embodiment in policy of our preferred values but also a list of strongly defining goals, which specify, at least, the direction of any given change when the best possible implementation of the goal is not in the short term achievable.  Others, in or out of government, may have different values and goals.  But a government which cannot articulate its values and clearly express its goals -- a government, therefore, without direction -- will quickly come to grief.  No good government -- it needs to be said -- is likely to discover these things by consulting opinion polls or by taking the advice of its bureaucracy.