The Carnegie Challenge: Restructuring the Energy Supply Industry of Western Australia

Vol. 5, No. 2

SUMMARY

The Report of the Energy Board of Review -- The Carnegie Report -- entitled The Energy Challenge for the 21st Century and delivered in April 1993, recommends a far-reaching, though phased, restructuring of the State Energy Commission of Western Australia (SECWA).  The emphasis is on the introduction of competition through the creation of new, publicly-owned energy authorities, new opportunities for private participation in energy supply, as well as open access to, and direct purchasing through, the new authorities for energy producers and consumers.

The need for this approach is derived from the apparent paradox that Western Australia has abundant, but high-cost energy.  Institutional factors, as well as geography and geology, are the major explanations for the high energy costs.

This Backgrounder reviews the Carnegie Report and confirms that only a thorough-going process of reform will eliminate the institutional obstacles to an efficient energy supply system in Western Australia.  At the same time it warns that there are substantial obstacles to reform, the major one being the Collie coal-fired proposal for a 600MW station.  Even if this proposal were to proceed as only a 300MW station, as has been suggested, it would still act to blunt the reform process by doing nothing to solve the energy surplus problem or reducing energy costs.  It would also be a signal that the government was willing to pander to the vested interests associated with the status quo.

A high level of political determination and public support will therefore be required for successful reform of SECWA.  Not to proceed with the process of institutional change will hold Western Australia back economically, in the face of far-reaching change in the energy supply industry in the Eastern States of Australia.

INTRODUCTION

The Carnegie Report is the culmination of a number of independent reports into the operations and structure of the State Energy Commission of Western Australia (SECWA) which have highlighted difficulties with, and the need for change in, SECWA. ⁽¹⁾

The most tangible source of concern with SECWA lies in the prices for electricity and gas charged by SECWA.  Electricity prices in Western Australia are some 40 per cent above the Australian average (see Chart) and gas prices are unable to offer a local advantage because of the link with oil and coal prices in the gas supply contracts between SECWA and the North West Shelf Joint Venture Participants (NWSJVP).  Typically, these outcomes have been excused on the grounds of geography, geology or the size of the local market.  The thrust of the reports mentioned above, however, is to suggest that the institutional structure itself is a root cause of the high energy prices.

Average Electricity Prices -- All Customers, 1988 and 1992
(cents per kWh, year ended June)

Source:  Electricity Supply Association of Australia

Note:  *The national figure is a weighted average

The institutional problem derives from SECWA's formation in 1975.  It was created primarily as the economic development arm of the Western Australian Government.  The concentration of market power over all energy markets (other than liquid fuels) in SECWA was an attempt to use that power to supply energy for the further processing of the State's mineral resources.  That approach to the promotion of resource development is now seen to have failed.  The emphasis on controlling the State's energy resources through SECWA came at the cost of a more commercial approach and the outcome has been a high-cost energy system for consumers, with minimal gains in resource development.  The most obvious manifestation of this misplaced approach was the fuel supply contracts with coal and gas producers negotiated by SECWA which gave it an over-supply of high-cost energy.

When public enterprises lack both competition and a direct commercial objective they tend to entrench inefficient labour and management practices into their operations.  SECWA, in particular, has suffered from industrial relations problems associated with the ability of the unions to negotiate directly with the relevant minister, effectively by-passing SECWA management.  The consequence of all this is that, according to one review of state energy authorities, "Western Australia's labour performance has been consistently the worst and contrasts markedly with Queensland's performance which was at a similar level until 1981-82". ⁽²⁾

The Carnegie Report quotes advice to it that labour productivity within SECWA could be improved by about 20 per cent.  The restructuring of SECWA, and the adoption of a commercial focus in a competitive environment, would lift the performance of both labour and management.  They would also eliminate restrictive work practices which add to both labour costs and the overall costs of energy supply.  While labour costs, in themselves, are only a small proportion of total electricity costs, restrictive practices limit the availability ⁽³⁾ of the system's operating plant, thus requiring larger-than-otherwise-necessary investment in plant.

SECWA is not the only publicly owned energy supply authority in Australia to have operated in this way.  But under the prodding of the Commonwealth Government, itself responding to the recommendations of the Industry Commission, authorities in the other States have accepted the path of institutional reform leading to greater efficiency.  Failure to take Western Australia down the same path will result in the State's becoming even less competitive.

This realisation provoked the then Premier of Western Australia, Dr Carmen Lawrence, to push for institutional reform in 1990.  It was not until the WA Advantage statement of February 1992, however, that there was a decision to establish the Energy Board of Review (the Carnegie Committee).  Three things were noteworthy about this decision.  First, neither SECWA nor the then relevant minister, Geoff Gallop, was consulted over the matter.  Second, the statement endorsed the separation of the Dampier-Perth natural gas pipeline from SECWA and the creation of a separate energy authority in the Pilbara region of Western Australia.  Third, the statement announced that SECWA's regulatory and policy functions were to be moved to the soon-to-be-created Department of Minerals and Energy.

In other words, the process of reform was to have started from February 1992, and was not dependent on the Report of the Carnegie Committee whose recommendations were mainly intended to deal with the separation of the electricity and gas operations into two or more entities.  To date, no action has been taken.

For the membership of the Board of Review, the Premier wanted a high profile team with equally high credibility so that its recommendations would derive sustained momentum from the personal commitment and standing of the Board.  Sir Roderick Carnegie was appointed Chairman because he met these requirements at the national level;  while the other two members of the Board, Stuart Hohnen and Bob Huxtable, also had a high and respected profile in the Western Australian community.  Stuart Hohnen had been the Coordinator of the Department of Resources Development and a member of the SECWA Board, while Bob Huxtable had been a Senior Partner in Price Waterhouse.

Also of interest in the composition of the Board of Review was the role played by Bill Heron, who was the coordinator of a working group responsible for the day-to-day activities of the Board, and at the same time State Deputy-Under Treasurer and a member of the SECWA Board.  Heron had also held a senior management position at SECWA before moving to the Treasury.  Of the working group, two members were seconded from SECWA (Mark Chatfield and Peter Oates) and the other from the Energy Policy and Planning Bureau (Vince Walsh).

Thus, although the Board was independent of SECWA, there were a number of ways, both formal and informal, in which SECWA's views could be made known to the Board.  The reaction of SECWA to the establishment of the Board was nevertheless one of hurt and dismay:  hurt from the perception that the appointment of the Board appeared to be a vote of no confidence in SECWA, and dismay because SECWA had thought it was doing a good job of reducing inefficiency within the existing institutional structure.

OBSERVATIONS AND RECOMMENDATIONS
OF THE CARNEGIE COMMITTEE

The challenge for the Carnegie Committee was the high price of energy delivered by SECWA and the view that the institutional structure bore part of the responsibility for that outcome.  The Committee focused on competition as the mechanism for achieving greater efficiency and lower prices.  Competition was now seen as possible because of technological changes (especially in electricity generation), but also because of the growing number of natural gas producers who could supply gas to the Western Australian market.  With the promotion of competition uppermost in mind, the Committee made the recommendations set out below (and illustrated in Figures 1 and 2 on the following page):

Figure 1:  The Restructured Electricity Industry

Source:  Adapted from Energy Board of Review,
The Energy Challenge for the 21st Century, 1993, page 38.

Note:  The heavy line indicates the "ring fence" separating the transmission and distribution systems

Figure 2:  The Restructured Gas Industry

Source:  Adapted from Energy Board of Review,
The Energy Challenge for the 21st Century, 1993, page 59.

• Separation of SECWA's electricity and gas supply functions into independent authorities;
• Placing the electricity generation function carried out in SECWA's power stations in the hands of a new authority to be known as GENERATION WA;
• Creation of a new authority, to be known as POWERWEST, to handle the activities associated with electricity transmission and distribution;
• The "ring-fencing" of the transmission function within POWERWEST so as to allow the transmission system to be used for the direct supply of electricity to large consumers wishing to bypass the distribution system (an activity known as "power wheeling");
• The establishment of separate business units in POWERWEST, focused on the Pilbara (POWERWEST Pilbara) and the isolated system supply (POWERWEST Isolated), to deal with supply to communities not connected to the south-west interconnected grid;
• Separation of gas transmission from gas distribution, through the creation of WA PIPELINES to handle transmission through the Dampier-Perth natural gas pipeline and GASWEST to handle distribution to consumers;
• Corporatisation of all four new agencies through the introduction of new mechanisms for accountability and control, which have the effect of reducing day-to-day political influence over the authorities and exposing them to constraints equivalent to those faced by private sector firms;
• The exercise of regulatory supervision with respect to disputes over the prices and conditions of supply of services from the authorities through the establishment of a Commissioner of Energy Services.

The scope for competition out of the above arrangements comes from a number of factors:

• Electricity and gas are competing sources of energy for a number of industrial, commercial and domestic uses.
• GENERATION WA will have to compete with other private entrants into the electricity generation business who may be able to supply power competitively to POWERWEST.  Initially this competition will come from cogeneration facilities, but it is possible to see the emergence of competitive dedicated generation facilities, particularly if the Pinjar power station were to be sold as recommended by the Board.
• The electricity generation sector (public and private) will be forced to compete with alternative ways of meeting the needs of electricity consumers if the supply authority, POWERWEST, adopts a "least cost supply" approach to the delivery of energy services.  With this approach, POWERWEST will invest in energy efficient consumption technologies if they are cheaper than purchasing electricity from generators.  (An example would be to supply consumers with high efficiency light bulbs if that was cheaper than buying more electricity.)
• Large consumers will be able to purchase electricity directly from generators rather than from POWERWEST, though a "wheeling fee" would be payable if POWERWEST's transmission system was used to carry direct purchases.  This would put pressure on POWERWEST to maintain efficiency.
• Large gas consumers will also be able to purchase direct from gas producers using WA PIPELINES and the GASWEST distribution system, hence bypassing GASWEST sales if it cannot compete with direct purchases.
• All of the new publicly-owned authorities will be corporatised, which in principle should mean that they are subject to the same regulatory and statutory requirements as a private sector equivalent (including taxation), and are without the legal privileges which attach to crown ownership (for example, land resumption rights).

The above structure is not new:  it is very similar to arrangements being put in place or under active consideration in a number of other States and countries including Victoria, New Zealand and England.  In all these cases the reason for change is to introduce competition wherever possible as a means of achieving improved efficiency and thus lower prices.  Indeed, by the standards of the restructuring taking place elsewhere, the Carnegie recommendations are relatively conservative.  A more radical set of recommendations would have separated completely the electricity transmission and distribution functions, broken the distribution system into a number of separate regional systems, and allowed the regional distributors to undertake a limited amount of electricity generation.

OBSTACLES TO THE REFORM PATH

There are, not surprisingly, a number of problems associated with this proposed switch from a vertically and horizontally integrated monopoly to a competitive model.  These problems, and the relevant recommendations from the Carnegie Report for dealing with them, are discussed below.

Some natural monopolies will still remain in the form of the transmission and distribution systems.  Their monopoly power could be exploited through their sales of electricity and gas to small consumers or through the charges they place on transporting electricity and gas through their system.  The Report has dealt with this problem by recommending the greatest possible transparency in all of the rules and pricing decisions associated with the transmission and distribution system.  There would be no commercial confidentiality associated with these operations.  Monitoring of this full disclosure is proposed to be in the hands of the independent Commissioner for Energy Services, who will also be responsible for the conciliation and arbitration of disputes associated with access and the price of access to transmission and distribution systems.

The existing fuel supply contracts with the Collie coal companies, the NWSJVP and other gas producers have given rise to a contracted primary energy supply to SECWA which is in excess of current and forecast needs.  These contracts effectively shut out new entrants into the energy supply system and hence restrict the possibility of enhanced competition.  The only effective solution to this problem is to delay the proposed private Collie power station and thereby avoid taking on another take-or-pay contract at a time of excess capacity and primary energy oversupply.  Deferment would enable a run-down of existing stocks of coal and gas by using present generating plant at a higher level of capacity operation.

As an immediate measure, the Carnegie Committee suggested that the existing SECWA-NWSJVP gas contract be broken down through allowing direct sales contracts to be negotiated between the NWSJVP and the small number of major gas consumers who currently take the bulk of the gas supplied under the existing contract.  In this way the NWSJVP could maintain their market share, and the problem of the excess gas left with SECWA might be managed through increased use in power generation, possible only if the Collie proposal is deferred.  This would also help to eliminate the existing cross-subsidy which currently supports the gas side of SECWA's operations.

Institutional change may be a difficult process without a sustained and widespread groundswell supporting change, or a determination by key decision-makers to push through with change.  The reason lies in the power of those with a vested interest in the maintenance of the status quo, who can exercise considerable influence in opposing change, particularly where the change involves complex technical and financial matters.  An example may be useful.  In the WA Advantage document in February 1992, the then Premier announced that, quite independently of the Carnegie Committee, a Pipeline Authority would be established to own and operate the Dampier-to-Perth natural gas pipeline.  Over the subsequent year, no useful progress was made on this decision, despite the setting up of an interdepartmental committee to implement it.

The reality is that the concentration of considerable power over energy markets in the hands of SECWA has given rise to an equivalent power over decision-making within the State government bureaucracy and Cabinet.  The Carnegie Report put it this way:

As the dominant business in the electricity and gas industries, SECWA has a monopoly on information.  In particular, it does not make public its load forecasts and its long range plans.  This places SECWA in a position of influence when offering policy advice to Government, and enables it to resist the oversight of other government agencies. ⁽⁴⁾

Thus, on the grounds of bureaucratic politics -- and the public interest -- the splitting of SECWA into a number of independent and competing agencies would open up both the information and the debate about government policies towards the energy supply industry overall.

There is a well-founded fear that if restructuring is to be left to the organisation that is to be restructured, it may not happen.  For this reason the Carnegie Report recommended the establishment of an Implementation Board under legislation giving it the responsibility and powers to implement the recommendations.  The commitment of this Board to the reform process will determine the speed and nature of the process.  The Report made no recommendation about the composition of the Implementation Board.  But it is essential that implementation not be controlled by existing SECWA Board members or SECWA senior management.  Ideally, the Implementation Board should consist of persons who have no personal or institutional vested interest in the outcome, and whose objective is to see an efficient energy supply system introduced as quickly as possible in a fair, open and competent manner.  The Board should also enjoy the active support of the relevant Ministers.

The industrial relations aspects of the reform process will be a major task for the Implementation Board.  Unless the workforce can be persuaded of the merits of change and shown that change is in the community's interest as well as its own, then obstacles will arise.  Clearly, the development of enterprise agreements in each of the new authorities will be at the top of the agenda, and these agreements will have to reflect an equitable and mutually-acceptable revision to existing pay and conditions for the workforce.

Community service obligations, particularly in the form of the uniform tariff policy, will be an obstacle to change.  The Report suggests that the uniform tariff policy should only apply up to reasonable consumption levels, with full cost applying thereafter.  Further, the cost of the more limited uniform tariff policy, as well as any other community service obligations, should be met by the government from its own budget.

There is also the reasonable argument against the creation of additional authorities.  This points to the increased administrative costs associated with a new chief executive officer, a new board and new units to handle internal administration in each of the four new authorities.  This argument is based on the notion that economies of scale exist when all these functions exist in a large organisation, and these economies are lost when separate organisations are created.  This is a perfectly legitimate concern, but the gains made possible because the whole industry operates more efficiently will more than offset possible higher increased administrative costs.  Further, it is possible that economies of scale would not be lost if certain administrative functions such as payrolls, human resources, and inventory management, were contracted out to specialists in the area, either in the public or private sectors.  (The contracting-out of garbage collection by local authorities to specialist waste management companies is a clear example of how economies of scale can be captured by small agencies.) Explaining the benefits of reform is an important educative task for the Implementation Board (dealt with further below).

But by far the biggest obstacle to reform is the Collie private power station proposal.  Even if all of the obstacles discussed above were overcome, no reform could occur if the Collie proposal were to proceed.  The State can have a Collie power station or industry restructuring, but not both.  The reason is that to take on the Collie proposal would, because of its size, eliminate the opportunity for a competitive electricity generation industry by removing all scope for cogeneration and the entry of competitive, dedicated but smaller-scale generators, and impose on SECWA another take-or-pay contract.  The Collie proposal would also extinguish the possibility of solving the problems of the existing take-or-pay contracts, which are themselves an obstacle to change because they restrict the development of gas-to-gas competition among producers.  There has, however, been a considerable exercise of pressure-group power and political self-interest in seeing the coal-fired station going ahead, despite the fact that there is no economic basis for it.

The forces at work supporting the Collie proposal include:

• The momentum generated by the 1989 SECWA decision to seek expressions of interest in a coal-fired station, and the receipt by ABB in November 1992 of a mandate, though not a contract, to build a coal-fired station;
• The National Party, which gave an unequivocal commitment to the project before the February 1993 election;
• The ongoing support for the project given by the former Minister for Fuel and Energy, Geoff Gallop, who was responsible for the process to put a coal-fired power station in place;
• South West region politicians, including David Smith and Doug Wenn from the ALP, Hilda Turnbull and Murray Montgomery form the National Party, as well as the State Government's South West Development Authority, together with the Mayor of Bunbury and the Collie Shire President;
• Pressure by the union movement, particularly the Coal Miners' Union;
• The natural self-interest of the Collie coal companies;
• Support by construction and equipment supply companies, particularly in the Bunbury-Collie region;  and
• The support of senior SECWA management and the SECWA Board members for the project.

All the above are in powerful positions to push for the Collie proposal to be accepted and as a result for the reform process to be halted.  Their motivations may be understandable on this point but their willingness to pursue the Collie proposal presents a major obstacle to industry restructuring and lower energy prices.  These forces have been sufficiently powerful to counter the advice given to the government by State Treasury, the former Department of State Development, and the Energy Policy and Planning Bureau to defer the Collie proposal.

THE REFORM VISION BEHIND CARNEGIE

Superficially, the restructuring programme appears to be a conservative one.  The initial division of SECWA into separate electricity and gas agencies only takes Western Australia to the same structure as already prevails in the other Australian States where electricity and gas supplies are in different hands.  To proceed only that far does nothing to improve Western Australia's position relative to the Eastern States.  Indeed the Eastern States have already embarked on further separation of their electricity and gas supply systems with, for example, Victoria proposing to divide the Gas and Fuel Corporation into a transmission activity and a separate distribution activity.  The State Electricity Commission of Victoria is to be restructured to allow a competitive generation section, a transmission business and a competitive distribution system.

The Industry Commission went further than Carnegie:  it recommended that transmission and distribution in Western Australia be separated, and that the distribution system be split up into separate regional franchises.  A similar recommendation was made with respect to the gas distribution system.

The spirit of Carnegie is, however, to be found in more than the specific institutional recommendations.  The overall thrust of the Report is that barriers to competition should be removed wherever possible, and positive support given to measures which will improve competition, some of which form part of the Report's recommendations.  Carnegie has not laid down a reform route in the nature of a tram track, with all the elements specified in particular detail well into the future.  What is essentially suggested is a reform process which has flexibility as a key characteristic, that is, flexibility to change as economic conditions, technology and institutions change.  Anyone expecting Carnegie to spell out exactly what the energy supply system will look like in 20 years' time will not find it in the Report.  Nor should they, because it is not possible to be precise about ail of the factors that will prevail at that time.  What Carnegie does offer, though, is that in 20 years' time, whatever the conditions, the energy supply industry can be appropriate for them.  This will be a situation quite unlike the present where it is very clear that the energy supply system is totally inappropriate for both the present and the future.

The other important aspect of the Carnegie vision is its move away from public enterprises as explicit instruments of economic control and development in Western Australia.  This may appear paradoxical in the light of recommendations to create four new public enterprises where there is currently only one, and with only a modest proposal to privatise the Pinjar power station.  The differences are, first, that the political relationship between the public enterprises and the government of the day will be one based on sound principles of corporatisation;  and second, that these public enterprises will not have the monopoly powers now exercised by SECWA -- even if some of them are monopolies, as may be the case with electricity transmission and gas transmission.  Their ability to exploit a monopoly position will be limited by the transparency with respect to their operations, and by the role of economic regulation in the form of the Trade Practices Commission, the Prices Surveillance Authority or the Commissioner for Energy Services, safeguards which do not exist with the present SECWA operations.

Future governments will have a limited ability to use these public enterprises to achieve policy objectives through the manipulation of energy prices or the use of energy supply contracts as is the case today.  The Royal Commission into WA Inc. drew attention to the cases where SECWA had been used to pursue political objectives on behalf of government which were inconsistent with a commercial orientation.  In a competitive environment the creditworthiness of the public enterprises, and of the government itself, will be adversely affected by such moves.

IMPLEMENTING REFORM

The Carnegie Report recommended that management of reform should fall to an Implementation Board, responsible for settling such details as allocating debt, assets, contracts and employment conditions, etc., to the new authorities.  It appears that the existing SECWA Board would continue to function until such time as further Acts of Parliament created new authorities.

Unless the existing SECWA Board makes an unconditional commitment to the reform process and provides all the information required by the Implementation Board on an open access basis, the scope for stalling the reform process is substantial.  Incentives exist within SECWA to stall the process because of what it will mean to the position and responsibilities of present personnel and their prospects in a new framework.  The whole of the Carnegie Report represents a comprehensive statement of the failure of SECWA.  There will, therefore, be incentives not to give complete support to the reform process.  Moreover, the backing given to the Collie proposal by SECWA puts it at odds with the need for deferral of the proposal if the reform process is to proceed.

One solution to this problem would be to use the legislation setting up the Implementation Board to create a new interim board for SECWA which, while maintaining the ongoing operational requirements of the organisation, would be at the same time fully devoted to the reform process and which could lead the rest of the organisation by example.

To generate public support for the reform process the Implementation Board should, at the same time, give resources to a public education programme which quite explicitly identifies the overall gains to Western Australians from the reform process.

One of the lessons from experience with reform elsewhere is that where far-reaching change is proposed, governments should move quickly to implement the reform.  Otherwise, the forces opposed to change will have time to mobilise both themselves and public opinion against change.  The government should move with all speed to implement the basic structural change proposed by Carnegie, and then allow evolutionary changes in response to the new opportunities that will flow from structural change.

MAKING THE VISION OPERATIONAL

The creation of four independent energy businesses, where there was only one, will change the way in which energy activity is carried out.  A horizontally and vertically integrated monopoly business is governed through internal administration emanating from decisions of the Board and senior management.  In a disaggregated framework, market relations between businesses will play a larger role.  In the Carnegie programme, the most marked change of this nature will be in the relationship between POWERWEST and the generators of electricity, including GENERATION WA.  The way in which POWERWEST purchases electricity from generators will be subject to contracts with generators which will have to cover, given the nature of the industry, purchases of power throughout the day and the year, as well as the purchase of standby capacity and other contingencies.  The negotiation and enforcement of these contracts will represent a completely new sphere of operations.  There is some risk that such contracts will not be complete, in that not all eventualities will be covered.  Their first characteristic, therefore, should be mutually-agreed flexibility and a limitation on the ability of one party to exploit the other in a situation where large, long-term capital outlays are involved.  Given that POWERWEST will not be the only purchaser of electricity from generators, the scope for exploitative behaviour by POWERWEST towards electricity generators is reduced.

On the other hand, the scope for collusion by generators may be a concern.  With only a limited number of generators possible in the small Western Australian system, the incentive to collude over prices and other supply conditions offers a potentially serious threat to the implementation of the Carnegie vision. ⁽⁵⁾  The solution lies in ensuring that entry into the industry is unrestricted, and that existing generators do not install excess capacity to be used as a deterrent to the entry of new firms.  In addition, the various regulatory authorities would need to keep close scrutiny over the conduct of the industry.  Maximum contestability of the generation industry will be maintained by minimising the sunk costs of entry and exit.  This could go so far as POWERWEST's actually identifying power station sites and installing the associated transmission facilities, while tenders were called for the supply of electricity from plant to be established on the indicated site.

Corporatisation has been recommended by Carnegie for each of the new energy businesses.  The processes of corporatisation and commercialisation are often confused in public debate, but are distinct in principle.  Commercialisation is the process of setting clear commercial objectives for a public enterprise and at the same time ensuring that it is not in a privileged position relative to its private sector competitors for the achievement of its commercial performance indicators.  In contrast, corporatisation is the process which seeks to establish only broad controls consistent with the long-run interests of the State, while leaving day-to-day management free of short-run political influence.  Thus corporatisation should increase managerial autonomy and responsibility, but at the same time the public interest is preserved through the agreement of the relevant Minister or Cabinet with the corporate plan of the business.  Corporatisation also involves a direct accountability to the Parliament through the tabling of an Annual Report and openness to parliamentary inquiries.

Corporatisation cannot be seen as a magic solution to the problems of control and accountability in government business enterprises.  Corporatisation with competition is a better outcome than corporatisation alone.  Indeed, there is a real fear that corporatisation and the preservation of monopoly status would only heighten the inefficiency associated with monopoly status.  This is because a politically-strong public monopoly facing a weak minister or Cabinet would be a public monopoly without any genuine public control or accountability.  To avoid such possibilities, all corporatisation must take place in the context not only of the appropriate measures of direct government accountability and control, but also of full openness to the other instruments of business regulation such as the Trade Practices Commission, the Prices Surveillance Authority and the Corporations law.

The Carnegie Report made no recommendation for privatisation of any of the existing SECWA assets, other than the Pinjar power station.  Its view was that the institutional structure at this stage was more important than the question of ownership.  If, in the future, the institutional structure functions as intended, it should be possible to contemplate privatisation.  (By contrast, the privatisation of British Gas, which resulted in the conversion of a public monopoly to a private monopoly, is an example of hasty and poorly structured privatisation which, while it may have generated considerable sale revenues, has not contributed to the development of a competitive and efficient gas supply industry in Britain.)

The Report does not come to terms with the politically-sensitive problem of prices to final consumers.  This is not a problem for large consumers of electricity and gas who, in a competitive environment, will be able to shop around among electricity generators and gas suppliers.  Small-to-medium industrial consumers and domestic consumers will be purchasing from monopoly suppliers of electricity and gas.  Judging by their comment on page 77 -- "Since they will not initially be free to set tariffs and are not to cross subsidise" -- the Board had in mind, initially at least, some method of price-fixing independent of the businesses.  This is, of course, the current practice:  SECWA's tariffs are determined by Cabinet on the advice of SECWA.  Cabinet is, however, reluctant to modify any SECWA recommendations, having neither the expertise nor the independent sources of advice to do so.

This situation is unsatisfactory because of the political second-guessing involved and the absence of any systematic and rational basis for tariff evaluation.  One solution may be to go further than recommended by Carnegie, and to split the electricity and gas distribution systems into a system of regional franchises allocated to competitors by competitive auction.  This is the method recommended by the Industry Commission.  Until that happens it may be appropriate to establish a government enterprises pricing tribunal along the lines of the NSW Government Pricing Tribunal (GPT) to determine base prices and price increases for POWERWEST and GASWEST.  The New South Wales tribunal:

is responsible for regulating the prices of all PTEs which may have a monopoly market position.  The objectives of the tribunal are to depoliticise the process of price-setting in the PTEs, and to achieve a balance among the interested parties:  the shareholders (namely, the State government), the PTE managements, and the PTEs' customers.  More specifically, the tribunal acts to determine the maximum price for monopoly services supplied by the agencies ... and to report on the pricing policies of those agencies. ⁽⁶⁾

Another issue with the potential to go beyond the original Carnegie recommendations is the structure for the Pilbara and the isolated systems.  The Pilbara is unique;  and even though Carnegie suggests a separate business unit, it may happen that the aspirations for major industrial development held for the Pilbara cannot be met by that structure.  This may lead to the creation of an independent Pilbara Authority as originally planned by the Lawrence Government.  Similar considerations apply to the isolated systems.  Each of the systems is different in terms of location, need, and the possibility of sources of supply for electricity or the services electricity can supply.  There may well be local forces wishing to bring about the separation of the isolated system from POWERWEST.

THE FUTURE

The Carnegie Report is the most important report the State Government has received on the operation of its largest business enterprise.  The evidence in the Report clearly shows that the future cannot be allowed to resemble the past.  The institutional framework put in place in 1975 has failed.  New technologies and resource endowments, as well as the gains from competition, now make it obsolete.  A new structure for energy supply is an urgent requirement for the economic health and the social well being of Western Australia.

The path of economic development for the State through energy-based resource processing has not been helped by the existing structure.  The location of resource-processing facilities is an internationally competitive one, and the best recipe for success internationally is competition in the domestic supply of energy.  The monopoly model was appealing to the planners in 1975 because they thought it gave them the control to carry out policy.  But control came at such a high cost that the ultimate objectives could not be achieved, and instead powerful interest groups were entrenched in privileged positions.

The best utilisation of the State's resources requires the combination of an efficient energy supply system with the flexibility to cope with rapid change in all areas of energy supply.  Failure to take the path recommended by Carnegie will deny Western Australians the benefits of our unique energy endowments and will needlessly pander to the short term interests of the status quo and those who hide behind it.

GLOSSARY OF TERMS

Availability	Measure of the capability of generating plant for energy production during a period compared with the total energy production if the plant had operated continuously at full output during the period.
Cogeneration	The generation of electricity as part of some other process such as the supply of low pressure steam or the recovery of waste heat and gases from an industrial process.
Common Carriage	A requirement imposed on transmission or distribution system owners to carry third party electricity or gas.
Conservation	The efficient use of energy, by forsaking energy needs or by using more efficient systems or appliances.
Demand Side Management	Commonly defined as the systematic planning and implementation of energy utility services designed to influence customer use of energy in ways that will produce desired changes in the utility's load.  It is also known as demand management and encompasses both load management and energy conservation.
Open Access	Similar to common carriage, but with access subject to the availability of capacity.
Power	A measure of the instantaneous demand for electricity.  Units used are gigawatts (GW), megawatts (MW) or kilowatts (kW), depending on the scale involved.
Reliability	The ability of the system to meet the demand imposed by users.
Ring Fencing	The process of separating some activities from others within an overall business operation.  This allows for the separate evaluation and operation of the ring fenced activity and a measure of relative autonomy.
Natural Monopoly	In an industry characterised by falling average costs as the scale of a firm increases, the outcome is that production will take place at the lowest average cost only if there is one firm in the industry.  The introduction of another firm represents a misuse of society's resources because two firms will both have to produce at a high cost level because economies of scale will be lost when the market is divided between them.
Isolated Systems	In Western Australia some 28 rural towns have their electricity supplied by local generation units, usually diesel powered.  These isolated systems supply approximately 7 per cent of the electricity supplied by SECWA, but at a considerably higher cost than electricity supplied by large power stations within the south west interconnected system.
Wheeling	The process of using the transmission system, and possibly the distribution system, to transfer power directly from a generation source to a consumer.  This comes about as a result of a direct purchase arrangement between the generator and the consumer, and the payment of a fee to the transmission system for the transport of the electricity.  When wheeling occurs the transmission system is being used on a common carriage or open access basis.
Transmission System	The high voltage power lines used to carry electricity to the distribution system and high voltage customers.  The transmission system has the characteristics of a natural monopoly which justifies only one system, usually in public ownership and subject to external regulation to avoid any misuse of monopoly power.  It is also capable of being operated on a common carriage or open access basis, and regulation is then also required to ensure fair treatment of consumers seeking access to the transmission system.  Equivalent notions apply in the case of gas transmission through high pressure gas pipelines.
Distribution system	The low voltage power lines which carry power from a terminal with the transmission system to consumers.  The distribution system has the characteristics of a natural monopoly but distribution systems have been separated into regionally based systems which offer a measure of competition between each other even though they may be a monopoly within their own region.  The allocation of regional distribution systems may be done on the basis of auctions.  Similar notions apply to the low pressure gas distribution system.
Regulation	The set of statutory controls exercised over an industry.  In the energy supply industry regulation takes two forms, technical and economic.  Technical regulation fixes the physical terms and conditions under which the system operates in terms of voltage, electrical stability, load, and safety features.  Economic regulation refers to the controls over price and behaviour in conditions of natural monopoly and the maintenance of competition in circumstances where competitive firms (as in electricity generation) might seek to collude over price and output.
Corporatisation	The process of clearly identifying the accountability of and control over a publicly-owned enterprise.  In general corporatisation seeks to establish only broad controls consistent with the shareholder's (the State's) interests while leaving day-to-day management free of political influence.
Commercialisation	The process of replacing varied and often contradictory objectives for public enterprises with a single commercial objective subject to the constraints of a competitive industry or, in the case of a natural monopoly, the constraints (usually a limit on price increases) imposed to avoid monopoly exploitation.

Compiled with the assistance of glossaries from Industry Commission, Energy Generation and Distribution, Volume II, AGPS, May 1991;  and Bureau of Industry Economics, International Performance Indicators -- Electricity, AGPS, February 1992.

---

ENDNOTES

1.  The major reports are:  SRI International (1983), The Long-Term Management of Energy Resources in Western Australia;  Harman, F. and P. Newman (1984) Energy Policy in Western Australia;  Final Report of the Committee of Inquiry into Gas and Electricity Tariffs in Western Australia (1985);  Green Paper on Energy Policy Options for Western Australia (1989);  Report of the Review Committee on Power Options for Western Australia (1990);  Industries Assistance Commission (1989) Government (Non-Tax) Charges, Report No. 422;  Industry Commission (1991), Energy Generation and Distribution, Report No. 11.

2.  Lawrence, D, et al. "The Comparative Efficiency of State Electricity Authorities", in Johnson, M.R. et al., 1991, Contemporary Issues in Australian Economics, Macmillan, Melbourne, page 189.

3.  A glossary at the end of the paper explains the technical or unique terms used in this Backgrounder.

4.  The Energy Board of Review, The Energy Challenge for the 21st Century, Perth, April 1993, page 19.

5.  These issues are more fully developed by K.D. Cole, 1993, "Vertical integration vs competitive markets:  a study of the proposals to restructure SECWA", Murdoch University Economics Department, Working Paper No. 91, (forthcoming).

6.  Cited in Richard J. Wood (ed), Reform and Recovery:  An Agenda for the New Western Australian Government, Perth, Wood & Associates, March 1993, page 103.

Thought for Food

The Genetic Revolution:  Scientific Prospects and Public Perceptions.
by Bernard D. Davis (ed.),
Johns Hopkins University Press

&

Beyond Mendel's Garden:  Biotechnology in the Service of World Agriculture
by Gabrielle J. Persley,
CAB International

&

Biotechnology, Agriculture and Food
OECD

FIELD TRIALS of cotton that is genetically engineered to resist attack by cotton bollworms are in progress in Australia, with encouraging results.  Other Australian crops such as lupin, tomato, potato, eucalyptus, pine, fruit trees and ornamental flowers are all likely to be affected by gene technology in the foreseeable future.  Already in China there are extensive field trials of new disease-resistant crops, and in the United States genetically manipulated Flavr Savr tomatoes are about to reach the supermarkets.

These events are the start of an ongoing wave of technological change that started as fundamental genetics research.  The history of this technology can be traced back to the 1970s when innovative new research methods precipitated a major restructuring of experimental strategies that still continues to affect almost all basic biological research.  By the late 1980s this biotechnology revolution had moved from the pure research laboratories to practical medical diagnosis and therapy.  As the direct result of this surge in genetic innovation, hundreds of new diagnostic tools, new vaccines and new disease treatments are now coming through the long regulatory review process.

I have been searching for books that I can recommend to non-specialist readers needing to find out how gene technology may affect farming and food production.  The difficulty in this task lies less in the complexities of the science than in the vastly differing viewpoints and motivations of those who write on the topic.

When they write stories journalists search for a special angle, essentially a deliberate distortion.  When the new biotechnology is reported in the press it is almost always in terms of a purported breakthrough or a disaster.  Activist groups are similarly dependent on controversy and drama for their existence, and several are vocal in their criticism of gene technology.  Unfortunately, they tend to create mountains out of mole-hills, by relying on inaccurate information or an inadequate understanding of biology.  Scientists have a different problem:  their professional reputations rest on their ability to separate objective-evidence from speculative opinion.  It is no surprise, then, that they habitually defer judgment on issues that hinge on subjective opinion -- such as conjecture about second-order future consequences of new technology.  The result is a debilitating public silence on controversial matters when -- forthright and informed commentary is sorely needed.

The three recent books I have selected offer a way through this situation for the questioning student, the puzzled public servant or the concerned countryman.  All draw on the services of scholarly contributors, although none of the trio is overly technical.  Controversial social and public policy implications, generally left out of the discussion in science texts, are provided in a context of reasoned discussion, and in places they provide a lively and witty debate.

Of the three, The Genetic Revolution, edited by eminent American microbiologist Bernard Davis, certainly presents the most thought-provoking debate.  Of all its chapters (which include offerings by ecologists, a US Food a n d Drug Administration biotechnology regulator, a lawyer and several specialist scientists) the best two, as far as I am concerned, are the one by Aaron Wildavsky and another by Harvey Brooks and Rollin Johnson of Harvard University's Kennedy School of Government.

WHAT IS NATURAL?

Wildavsky's ideas on the different ways nature is viewed -- "cornucopian", "fragile", "perverse" or "tolerant" -- provide an entertaining clue to the passionate differences of opinion the genetic engineering debate often elicits.  Wildavskyargues that the whole debate between proponents of "full speed ahead" with biotechnology and those who wish to delay it can be explained as a dispute over the definition of two terms, natural and unnatural.  "When adherents of a particular way of life convince others that it is the only natural way, so that its perceptions of how the world works become the way the world actually is, then they have won".  If this is so, then wider knowledge of how the transfer of genes between completely unrelated species has often occurred in nature, and of how the natural antics of "jumping genes" imitate the events of laboratory-based genetic engineering may well dispel some of the current unease with which laboratory genetics is regarded.

Beyond Mendel's Garden, as the title implies, concentrates on describing how new genetic methods are being used to improve crops.  The book is extremely useful for providing an understandable introduction to worldwide trends in this technology.  It provides more detailed background on actual agricultural research than The Genetic Revolution and gives special attention to discussing socio-economic issues relating to Third World development.  While it concisely analyses issues such as patenting of living organisms, the sophisticated public policy philosophy provided in Davis's book is missing.

For even more detailed surveys of both technology and socio-economic issues, the OECD reports on biotechnology are extremely useful reference volumes, providing an up-to-date bridge to the specialised technical literature.  Biotechnology, Agriculture and Food is a very recent volume in this series, specifically directed at the interested lay public and at policy-makers.  Among the issues addressed is the concern that biotechnology may have disruptive effects on Third World economies, due to the invention in First World countries of novel methods for production of commodities, such as pyrethrin.  This may promote local substitution for traditionally imported source materials.

The OECD report analyses in depth the global strategies of leading "agrofood" firms (Chapter V) and the economic impact of agricultural biotechnology (Chapter VIII).  It concludes that the alleged adverse effects on the Third World have been over-dramatised.  Positive effects, for example the probable direct benefit to Malaysia of novel palm oil technology, need to be taken into account.

These books convey the impressive range of effort going into securing our food and fibre supply for the next century, and an analysis of the problems that may be generated.  Although they do not provide immediate help for those seeking specific information on the eventual effects on the Australian rural scene, they provide an accurate global perspective that is necessary for evaluation of local implications over the coming decades.

A final summing up of public policy issues relating to genetic engineering is given by Brooks and Johnson in Bernard Davis's book.  They make constructive suggestions as to how debate on the topic can move forward.  We should, they suggest, separate concrete decisions from philosophical views of the world and technology, and try to focus on the former.  Specific decisions can thus be made to fit specific circumstances.  This seems pretty obvious really:  if we wait for a general consensus on philosophy and politics, the delays before transgenic crops reach the farm gate will be interminable.

In Contempt of America

Anti-Americanism:  Critiques at Home and Abroad
Paul Hollander,
Oxford University Press

FEW PEOPLE would try to argue that American society has ever been perfect;  fewer still it is now.  But this book is interested in examining that group who believes that American society is irredeemably evil:  intolerant, racist, stupid, and corrupt -- with no balancing virtues whatsoever.

For Hollander, a Professor of Sociology at the University of Massachusetts, tracking anti-Americanism is a life passion.  An earlier book, Political Pilgrims, looked at the way in which the intellectual class has applauded a variety of Marxist societies.  Anti-Americanism explores this theme further from a post-Cold War perspective as well as broadening the discussion to embrace the political correctness movement of the 1990s.

Hollander makes it clear that his intention is not to say that US society has no flaws.  He believes that the US has virtues as well as vices.  For committed anti-Americans, on the other hand, the absolute evil of the system is utterly self-evident and undeniable.  Contrary evidence is simply dismissed as proof of the depth to which the conspiratorial nature of "the system" runs.

Even while describing its roots, Hollander does not or cannot explain why anti-American beliefs are held with such intensity.  But he hints that ultimately it is not rational:  like a religion, it is an article of faith rather than a balanced analysis.  Indeed, for many it seems to have taken over the role that traditional religion once played.  Having torn down the value system which sustained previous generations, they needed to find (or invent) something else to believe in.

As an organised movement, anti-Americanism began in the turbulent 1960s.  Vietnam, the assassinations, and the rise of the civil rights movements highlighted many of America's problems.  Nixon and Watergate made the process of government itself suspect.

Hollander is quick to point out that in the 1960s, the quest for rights had a moral validity.  The strategic use of the law, through civil actions and Supreme Court decisions, played a crucial role in ending racial segregation and other gross inequalities.  But before long the process assumed the momentum of a runaway train.

Hollander believes that only a small number of Americans despise their own country;  but they were (and are) strategically placed -- in the media, the churches, the education system and the legal profession.  Once the notions that everyone had a right to everything and the law was the means to get it were planted, they spread like weeds.  The instance of prison inmates suing the government because their scrambled eggs were too hard would be merely amusing if it did not so effectively delegitimise those cases where the issue is truly important and the cause just.  The avalanche of law suits in the 1980s and 1990s -- what Hollander calls "the collapse of common sense" -- might be thought of as a second-generation consequence of the anti-American ideology, rather than something driven directly by anti-American individuals themselves.

MORAL EQUIVALENCE

Hollander also pinpoints the notion of "moral equivalence" as crucial to the anti-American view of the wider world.  Hence the income gap in the US is seen as equivalent to systematic political repression in the former Soviet Union, police as equivalent to stormtroopers.  "AIDS is our Holocaust", writes a gay activist.  "Reagan is our Hitler and New York is our Auchswitz".

Political correctness, the inverted end of the rights process, seeks to quash other opinions and even twist language to the views of the true believers.  Even calling coffee without milk "black" can be deemed a racist slur (it has to be called "dark").

Anti-Americanism starts from the assumption that competitiveness, differences of ability, and the desire to better oneself are purely the result of socialisation.  To prove its point, the ultra-liberal city council of Berkeley set up a separate park for dogs, on the premise that, freed from their owners' influence, the dogs would form an egalitarian canine community.  The plan failed, of course:  the dogs formed a strongly hierarchical pack.  But the Berkeley Council continued undeterred.

In fact, reality has a way of bursting in on the anti-Americans.  Nicaragua under the Sandinistas was portrayed as a haven of popular democracy and workers' prosperity (just as Cuba and North Vietnam had been portrayed in earlier years).  But then the Sandinistas were turfed out in elections:  it seems that the Nicaraguans did not share the views espoused in university halls.  The anti-Americans responded that the election was a set-up, with the conservative victors manipulating the electorate with advertising and bribes.

This sort of hypocrisy is a hallmark of anti-Americanism.  Democracy is only accepted when it gives the results that the anti-Americans want.  Tied to this is another prevalent view:  that elections do not really matter, as real power lies elsewhere.  Its location is never precisely defined, but many of the intellectual class seem to believe in a behind-the-scenes cabal of industrialists and generals.

The collapse of communism, the antithesis of much of what America has traditionally stood for, might have been expected to give the anti-Americans pause for thought.  Not so:  if anything, it led them to call for a revolution at home as well -- usually in relation to their particular obsessions.  One found "an obvious connection between the pro-democracy demonstrations in East Germany and demonstrations in the US for reproductive rights".  Another linked the demise of communism with the need "to begin the process of striking homophobia and heterosexual bias from our education system".

ANTI-AMERICANISM OUTSIDE AMERICA

Hollander also dissects anti-Americanism in Europe, Canada and Mexico.  Intellectuals in these countries spend a great deal of time trying to explain why their less-informed countrymen consistently enjoy American movies, McDonald's and Disneyland;  and, even more, will emigrate to the US if given the chance.  It is here that the concept of "false consciousness" plays its most crucial role, and here that the elitism of the intellectual class is most obvious.  Only we can see America for what it truly is, say the over-educated to each other.  Everyone else is being manipulated and tricked.

But Hollander believes that outside the US, anti-Americanism is largely confined to academic circles, and has failed to find the place in mainstream society that it has established in the US.  He does not, unfortunately, extend his study of anti-Americanism to Australia, but one might say that it remains a limited passion in this country.  The Australian branch of the breed has enough to talk about -- the military alliance, multinationals -- but to date the bulk of our society has shown little interest in adopting the ideological package, although individual issues (mainly connected with trade) occasionally hit the headlines.

ZERO-SUM GAME

On its home ground, however, anti-Americanism has become an orthodoxy, with devastating consequences.  This, in the end, is Hollander's point:  anti-Americanism has undercut any feeling of community by drawing a picture of society as a zero-sum game:  one person is poor and deprived because another is rich and privileged:  us against them.

At the same time, it has removed any sense of individual responsibility.  For instance, the violence of a black criminal is explained away as really the result of, and a response to, an endemically racist society.  The discussion of morality has been replaced by an obsession with socialisation -- except in the case of middle-class white males, who are seen as entirely responsible for their actions and attitudes, especially if they vote Republican.

Can American society recover from the assault from within?  Hollander is not optimistic.  He takes the view that if the anti-Americans were going to be persuaded by reality, it would have happened by now.  So the future is grim:  anti-Americanism will continue until it causes the society that bred it to collapse.

Commonwealth Government Expenditure: The Need To Cut -- And How To Do It

Vol. 5, No. 1

SUMMARY

Since 1989-90, the Commonwealth Budget has deteriorated from a surplus of 2.2 per cent of GDP to a deficit of about 4 per cent of GDP.  Spending has increased by 16.5 per cent in real terms and public service employment by 7.8 per cent.  Over the same period the economy grew by 2 per cent (real).  So much for Keynesian stimulatory policies!

Now that the economy has started to recover, the deficit must be wound back so that private sector growth is not stifled by increased interest and exchange rates.  It is not sufficient to achieve a deficit of 1 per cent of GDP by 1996-97, as the Government proposes.  The aim should be a small Budget surplus by 1995-96.

This should be achieved by spending cuts, not tax increases.  The main target should be Commonwealth "own purpose" outlays, which are 2 per cent of GDP higher than when Labor assumed office in 1982-83, and where there has been a major erosion of control in order to buy the support of special interest groups.  The aim should be to reduce such spending by 1 per cent of GDP per annum in each of the next 3 years.

This paper details cuts to Commonwealth spending totalling about $9 billion over the next two years, plus $9 billion in additional asset sales over the next three years.

INTRODUCTION

Since 1989-90, there has been a major deterioration in the Commonwealth's budgetary position, with the overall balance moving from a surplus of $8.0 billion (2.2 per cent of GDP) to an estimated deficit of about $16 billion (4 per cent of GDP) in the current year.  Over $11 billion of this deficit is estimated to be on current account, that is, the Commonwealth is borrowing over $11 billion to finance current expenditures, including interest costs of about $5 billion.  The $24 billion deterioration -- the largest in the Budget since World War II -- reflects a massive $22.7 billion increase (over 16.5 per cent in real terms) in outlays over the three years since 1989-90.  Employment in the Commonwealth Budget sector has increased from 148,000 in 1989-90 to an estimated 159,500 in 1992-93, a rise of 7.8 per cent.  Moreover, the "underlying" Public Sector Borrowing Requirement for 1992-93 has recently been revised from an estimated 5 per cent of GDP to 6 per cent (or about $24 billion), ⁽¹⁾ which would make it the highest since the record 6.9 per cent figure for 1983-84 and over 5 percentage points of GDP higher than the underlying PSBR in 1989-90. ⁽²⁾

While the increase in spending has been due in large part to the recession and the resultant increase in unemployment, changes in economic circumstances make it difficult to estimate how much of that has been "cyclical" (see below).  That aspect apart, however, it certainly reflects revenue and expenditure measures taken by the Government in a largely fruitless endeavour to impart a short-term stimulus to the economy. ⁽³⁾  On the outlays side, the most important of these measures were:

• Additional funding for roads and rail transport announced in One Nation -- $1,000m;
• Increased labour market and training programmes -- $900m;
• Local capital works programme -- $350m;
• Increase of $6 per fortnight in pensions and family allowance supplement -- $450m p.a.

Some of the increase in expenditure is, to a degree, cyclical -- that is, it will be wound back as the economy recovers.  In addition, however, there have been major structural increases in the deficit on the revenue side reflecting, in particular, personal income tax cuts which have reduced revenue by the equivalent of about 2.5 per cent of GDP over the three years.

Now that economic activity (though not employment) has started to recover, the Government appears to have recognised that there is a need for the Budget deficit to be wound back and, hence, to reduce the Commonwealth's draw on savings.  Such a strategy is, of course, essential in the medium term in order to ensure that the private investment that will provide the basis for jobs growth is not "chopped off" by increased interest and exchange rates, as has tended to happen in the past.  Indeed, it will help reduce real interest rates from their still-high level, thus providing a positive stimulus to new investment.

It is also important to recognise that the present policy of "deficit neglect" may not even be "stimulatory" in the short term.  As the OECD emphasised last December, "it is difficult to see how consumer and business confidence can be restored unless the authorities deal effectively with unsound public sector financial positions".  The IMF Managing Director also stated recently that where "public sector deficits have been allowed to develop ... it is necessary without delay, and without being haunted by the fear of short-term contractionary effects, to convince the markets of governments' resolve to attack the problem by taking vigorous, immediate measures".  These statements, and the decisive action by President Clinton and US Congress to start reducing the US Budget deficit, reflect the fact that "deficit neglect" appears to have done nothing to stimulate private sector recovery overseas, leaving the clear implication that it may be counter-productive,

However, by contrast with the earlier stated objective of returning to a Budget surplus, ⁽⁴⁾ Treasurer Dawkins (after initially dismissing concerns about the deficit altogether) has now stated only that the Budget deficit will be brought down to 1 per cent of GDP (equivalent to about $4 billion in 1992-93) by 1996-97, after cuts in personal income tax estimated to cost about $8 billion in that year.  Whether the Treasurer envisages that this will occur without the need to cut expenditure or to increase other taxes is not entirely clear.  Some of his statements suggest that he is of this view, which would imply a "cyclical" component of the deficit of the order of 4.5 per cent of GDP. ⁽⁵⁾  Most private sector forecasters, however, are estimating that, assuming that the only policy change would be the 1995-96 and 1996-97 personal income tax cuts, the Budget deficit in 1996-97 could still be around 2.5 per cent of GDP, equivalent to about $10 billion in 1992-93 (or $13 billion in 1996-97), implying a smaller cyclical component.

Moreover, the recent spate of press speculation about possible options for increasing taxes suggests that Government "sources" are trying to soften up economic and other commentators to accept that there is no more scope to cut spending and that tax measures will need to be taken to reduce the deficit;  that is, there is an implication that the Government does not really believe that there will be an "automatic" reduction in the deficit to 1 per cent of GDP.  Meantime, the Canadian Government recently announced extensive measures to cut public sector spending over 5 years in response to growing concerns about the level of Canada's external liabilities (which are in fact a smaller proportion of GDP than Australia's) and its Federal Budget deficit. ⁽⁶⁾

In any event, the 1 per cent of GDP deficit "target" set by the Government should not be accepted.  A policy objective of producing, and then maintaining, a Budget surplus would increase the scope for private investment to increase while minimising the blow-out in the current account deficit and external debt, and the likelihood of a return to high interest and exchange rates.  It would help offset the adverse effects on private sector saving of other Government policies, especially from the extension of social welfare to middle income groups and the still relatively high marginal tax rates.  It is to be hoped that the report commissioned by the Treasurer from Dr Vince Fitzgerald on national savings options will address the desirability of aiming for a Budget surplus as one contribution to increasing saving.

The Treasurer has also foreshadowed a new approach to States' borrowings which envisages that the annual Loan Council meeting would attempt to agree on the total net draw on savings by the State public sector and the public sector as a whole;  that is, agreement would be reached on drawings on existing financial assets as well as new borrowings.  Such an approach will require that the Commonwealth justify its proposed net draw on savings for 1993-94 at the June Loan Council meeting.  Clearly, as the sector responsible for about 4.5 per cent of GDP of the 1992-93 PSBR, the Commonwealth will need to assume responsibility for most of the reduction in the public sector's net draw on savings.

In addition to rejecting the 1 per cent of GDP deficit target, there should not be any acceptance that Commonwealth outlays cannot be "cut" to any significant extent.  While estimated Commonwealth Budget outlays of $110.5 billion in 1992-93, or 27.4 per cent of GDP, are about 1.4 percentage points lower than in 1982-83, they are currently 3.6 percentage points higher than the recent low reached in 1989-90.  Moreover, Commonwealth general government ⁽⁷⁾ "own purpose" outlays in 1992-93 are estimated at around 19.5 percent of GDP, which is 2 percentage points higher than when the Labor Government assumed office in 1982-83 (see Table 1 on the back page).  Over the same period total Commonwealth assistance to the States has decreased from about 9.6 per cent of GDP to just over 7 per cent of GDP.  In short, the reduction in the share of national resources taken by the Commonwealth Budget since the Labor Government assumed office in 1982-83 is more than accounted for by the reduction in assistance to the States.  The Commonwealth cannot therefore claim to have "cut" its own outlays:  indeed, the contrary is the case.  Does anyone really believe that the level of spending (as a proportion of GDP) by the Fraser Government in its last year on its own purposes was appropriate? -- still less the higher level now? ⁽⁸⁾

Leaving aside such historical comparisons, however, the case for cutting outlays rather than increasing taxes derives from the obvious adverse incentive effects of increasing the tax burden and the favourable effects from a potentially more efficient use of resources.  As a simple matter of common sense, smaller government is better than higher taxes provided this can be achieved in an equitable and efficient manner.  It is difficult to avoid the conclusion that, particularly in the last three years, the Commonwealth has developed considerable "fat".  There appears to have been a major erosion of control over own purpose spending, with new programs being developed or old ones expanded as a largely political response to the recession and, in particular, to try to either "buy" the support of various special interest groups and/or to soften the criticisms of such groups.

It is true that the Commonwealth's Forward Estimates suggest that, on a no policy change basis, Commonwealth Budget outlays would fall from 27.4 per cent to around 25 per cent of GDP by 1996-97 (see Table 2).  However, such forward projections have to be taken with a heavy dose of scepticism.  They have already been overtaken to some extent by promises made in the election campaign, after the Mid-Year Review, which are estimated to add $400-500 million to outlays in each of the next 3 years.  They do not, in any event, alter the case for taking action to reduce outlays in order to reduce the deficit.  Even keeping the increase in Commonwealth outlays to the same rate as inflation, that is, holding the real level of outlays constant at the bloated 1992-93 level, would involve a reduction in presently projected outlays in 1995-96 of about 1.5 per cent of GDP.

Accordingly, it is proposed that the Commonwealth Government should make the maximum possible effort to reduce spending progressively over the next three years, at the rate of about 1 per cent of GDP per annum cumulatively, so that by the third year (1995-96) the total cuts should be the equivalent of about 3 per cent of GDP, which is equivalent to about $12 billion in 1992-93.  This should be sufficient to achieve a small surplus in 1995-96.  This objective should be announced at the June Loan Council meeting, which should aim for a comparable reduction in the underlying PSBR.  In addition, the Commonwealth should aim to reduce Commonwealth debt by around $9 billion in 1992-93 prices over the three year period from the proceeds of asset sales not already foreshadowed.

The following summarises possible cuts to Commonwealth spending by function for the first two years, totalling about $9 billion in 1992-93 prices, together with possible additional asset sales of $9 billion over 3 years.

Total Summary

	$M (1992-93 Prices)
Social Security	2078
Health	1534
Education	572
Housing and Community Amenities	497
Defence	350
Culture and Recreation	378
Transport and Communications	160
Industry Assistance	195
Labour and Employment	591
Prime Minister	44
Aboriginal Affairs	180
Other Economic Services	30
Law, Order and Public Safety	71
Foreign Affairs and Overseas Aid	283
General and Scientific Research, Nec	105
Administrative Services	467
Payments to Other Governments	253
Total Savings in "Underlying" Deficit	7793
Public Debt Interest (including from additional privatisation)	1100
Total Reduction in Outlays	8893
Privatisation (additional asset sales to those planned)   Sale of all Commonwealth Bank   Federal Airports Corporation   Telecom (Part of) Total Privatisation	3000 500 5500 9000
Total Reduction in Deficit over 3 Years	21600

Detailed cuts by function, as per Budget Paper No. 1, are set out in the following sections.  The approach adopted is far from being of the "slash and burn" variety.  Rather, it consists of proposals that:

• Target welfare assistance more closely so as to concentrate it on needier groups, and put greater emphasis on self-help or family-help, so as to reduce dependency;
• Concentrate Commonwealth activities more within departmental structures rather than in separate, empire-building quangos which cater to and foster special interest groups;
• Reduce or eliminate taxpayer-funded assistance to special interest groups which have no or only limited justification in terms of national or welfare interest;
• Reduce duplication of activities with the States where there is no, or only a limited, national economic or welfare requirement for Commonwealth intervention;
• Seek greater private sector involvement in the promotion and support of research and cultural activities in particular;  and
• Generally seek to encourage private sector saving and a more efficient use of national resources, including by contracting out or privatising government services.

SOCIAL SECURITY AND WELFARE

This is by far the largest Budget item and the most important area that needs to be tackled.  The Budget estimate for 1992-93 is $37,943 million (34.5 per cent of total Budget outlays) which is $11.6 billion or 14.4 percent higher than outlays as recently as 1989-90.

One of Australia's structural problems is the deficiency of savings.  In no area of Commonwealth policy is the anti-savings bias stronger than in the social welfare area.  Inadequate targeting and the discouragement of "self-help" erode the incentive to save -- why save when the State will look after you?

	Outlays Per cent	GDP Per cent
1972-73	20.7	4.69
1976-77	26.4	7.29
1982-83	28.7	8.25
1986-87	27.2	7.84
1989-90	30.0	7.12
1992-93 (est)	34.5	9.28

Hence, the need is to ensure that benefits are properly targeted:  that they are concentrated on those who need them and that they do not discourage "self-help".  The Labor Government has improved the targeting of social welfare in some areas.  Nonetheless, over two decades, social welfare has continued to take up an increasing proportion of Budget outlays and GDP:

While this latest surge is largely due to the recession, it is evident that to stop the continued upward drift requires a much more determined effort to implement structural reform of the system.

Of course, the politics of radically reforming the social welfare system are unattractive to politicians whose natural (for some, highest) loyalty is to their own re-election.  However, substantial savings are possible if a realistic approach is adopted to social welfare targeting in the interests of reducing welfare dependency and improving saving.  The following highlights changes in recipients of major benefits, and in the average benefit, since 1982-83.

AVERAGE BENEFIT PAYMENTS (Per Annum)

Year	Age Pensioners		Invalid Pensioners		Unemployment Benefits
	Nos (000s)	$ /Hd	Nos (000s)	$ /Hd	Nos (000s) (a)	$ /Hd
1982-83	1,417	3,180	277	3,851	536	4,200
1991-92	1,482	6,693	487	7,354	770	8,744
$ Incr	5	19*	76	8*	44	18*

* Percentage increase after allowing for increase in CPI.

^(a) Note that the number of unemployment beneficiaries is usually less than the number unemployed.

Source:  Department of Social Security, Annual Report, 1991-92.

UNEMPLOYMENT BENEFITS

The number of people currently on unemployment benefits (Job Search Allowance and NEWSTART Allowance) is about 900,000, of which around half are on the long term (more than twelve months) Newstart benefit.  Outlays for this purpose were estimated at almost $7 billion in the 1992-93 Budget, but the Mid-Year Review increased this estimate by $570 million in the light of the downward revision in the forecast for economic growth.  At 1.9 per cent of GDP, benefits to the unemployed are about 0.6 percentage points of GDP higher than in 1982-83.

The fact that the rate of unemployment (now 10.9 per cent) is higher than at any time since the 1930s naturally attracts considerable and understandable concern about the economic and social costs.  It is necessary, however, to keep the situation in perspective.  In particular, the increase in unemployment over the past ten years is largely due to the increase which has occurred in the proportion of the working age population seeking work.

Also relevant is the fact that the proportion of the working age population that is employed has actually increased over the past decade and is about the same as it was in the early 1950s.  From this perspective the labour market situation, while not improving, has not deteriorated and the increase in unemployment can be attributed largely to a range of influences that is inducing more people to enter the work force.  Among such influences would be the 18 per cent increase between 1981-82 and 1991-92 in the real level of unemployment benefits, which overseas research shows to be a major determinant of the rate of unemployment.

A series of measures designed to reform the unemployment benefits system was announced in the 1991-92 Budget.  The objectives were of the carrot and stick kind -- carrots in the form of real help in finding jobs for those who want them and, for the work-reluctant, sticks in the form of testing work intentions more rigorously.  Perhaps of most interest was the provision that those unemployed for over twelve months lose automatic access to the unemployment benefit. ⁽⁹⁾  Such people must go onto a NEWSTART Allowance, but to get it they need to go through intensive interviews and accept help in finding work.  However, these changes did not promise significant savings and it is evident that the reforms were not expected to have more than a modest effect on the numbers on benefit.  Yet if they are properly designed and forcefully administered they should have a significant effect.

A more firmly administered NEWSTART style programme could cut into numbers on unemployment benefit, tackling in particular those who are voluntarily unemployed (that is, left their jobs) and those who are using the unemployment benefit as a pension (that is, some of the long-term unemployed).  Any onus-of-proof impediments to NEWSTART achieving this should be removed.  In February 1993, 12.2 per cent of the unemployed, or about 128,000, were unemployed because they had left their previous job.  Over 360,000 of the unemployed had been unemployed for over a year.

Because the number of unemployed has swelled so much, by over 100 per cent in 3 years, the review procedures have been under a great deal of strain -- notwithstanding increased staff numbers.  The apparent stabilising of unemployment numbers provides an opportunity to increase review activities and also tighten the activity/work test (for example, by requiring written confirmation from potential employers of a job request).  This should be able to reduce unemployment beneficiaries by 5 per cent or 45,000, saving $350 million p.a.

Measures to tighten access to unemployment benefits should, of course, be accompanied by measures to improve the operation of the labour market and, in particular, to allow maximum flexibility to employers and employees to negotiate individual contracts.

BENEFITS FOR MIGRANTS

The Department of Social Security has estimated that $400 million of social security benefits is being paid to migrants who have been in Australia for less than two years.

Last year the Government introduced a six month (residency) qualifying period for migrants to be eligible to receive benefits.  This is estimated to save $20-$30 million p.a. in unemployment benefits alone.

This qualifying period should be increased to two years for non-refugee immigrants.  Such an extension would also have the effect of reducing pressure on the immigration programme as the incentive to emigrate provided by Australia's generous welfare system would be diminished.  Potential savings over time from this measure would be an additional $150 million per annum.

SOLE PARENT PENSIONS

Australia offers one of the world's most generous sole parent pension schemes, which is costing around $2.8 billion p.a. compared with assistance to families with children of around $2.6 billion p.a.  The USA provides support for the first 12 months, while even cradle-to-grave welfare social democracies like Sweden grant assistance for only 3 years.  Australia provides income support for children up to 16 years.  When the Government also provides generous child care support and family assistance for a working parent, this length of support is clearly excessive.  Prolonged welfare payments tend to keep the parent out of the workplace, causing a loss in employment skills and hence adding to the difficulty in regaining work.  An appropriate policy would be to cut eligibility to age 6, which over time and with safety nets (such as the provision of unemployment benefits) would save $500 million p.a. net.

UNIFORM AGE-PENSION AGE

With women living longer than men and taking a more active role in the workforce, there is no justification for the continued discrimination on age eligibility for age pensions.  Men do not receive an age pension until age 65, but women currently become eligible at age 60.  The age for women should be progressively increased to match the age for men at 65.  This would save at least $50 million per annum in the first instance, increasing over time.

Once the age eligibility is the same, a move should also be made to increase the age pension eligibility for all Australians to 70 by raising the eligibility age by one year every two years.  This will help cope with the cost of an ageing population which is also living longer.

INCREASED BENEFITS WAITING PERIODS

Particularly as the economy recovers, the Government should ensure that unemployment benefits (Job Search Allowance) and substitutes (Sickness Allowance) are not considered an automatic first stop.  There is currently only a 1-week waiting period for these benefits (except for school leavers who are subject to an extra 12 weeks).  This period should be extended to at least 3 weeks other than in cases of real hardship.  Special Benefits would be available in such cases.  This 3-week period would provide a net saving (after allowing for Special Benefits costs) of at least $100 million on Job Search and an extra $50 million on Sickness Allowance.

REMOVING THE 4-WEEK LIMIT ON THE LIQUID ASSETS TEST FOR BENEFITS

Lifting the current 4-week deferment on benefits eligibility for those in excess of the Liquid Assets Test provisions for beneficiaries would mean that those who have large redundancy payments, but otherwise qualify for benefits would have to wait longer (dependent on the value of those Liquid Assets).  Extending this cap would see individuals having to use up more of their redundancy payments (which exclude rolled-over superannuation) -- the purpose for which they are paid -- before receiving JSA.  An average of 8 weeks' extension for these people would save $120 million per annum.

WIVES OF DISABILITY PENSIONERS

Wives of Disability Support pensioners are currently entitled to a pension because of their spouse's status.  There is no requirement that they be actively involved in caring for their spouse.  If one partner can work, then unless they are required at home as a carer they should not be eligible for support.  This pension benefit should cease for all wives under age 50 not actually undertaking a full-time carer's role.  Those under 50 who are required to act as full-time carers would be eligible for a Carer's Pension in their own right.  This measure would save at least $100 million p.a.

DEFERRED PENSIONS

As the compulsory retirement age is being removed the Government should be encouraging those people who are able, active and willing to work to continue as long as they like.  The pension age is now over 12 years less than the life expectancy (at pension age) for men and 20 years less for women.  A deferred pension scheme which granted increased pension benefits in lieu of extra years of work/deferment to entitlement could save considerable money with an ageing population.  A bonus rate of 8 per cent per year of deferment, assuming an average two year deferment for 10 per cent of newly eligible pensioners, would save $100 million after a couple of years and grow over time.

ENFORCEMENT OF AGE PENSION RESIDENCY REQUIREMENTS

The DSS should cease granting special benefits in lieu of aged pensions where age pension aged people have not been residents for 10 years.  The law requires a minimum of 10 years residency to be eligible for the retirement pension and granting the special benefit instead makes the law ineffective.  The full intention of the law should be enforced and 10 years residency should be required for retirement pensions or alternates.  This would save over $50 million per annum.

DISABILITY SUPPORT PENSIONS

Better targeting of the Disability Support Pension is needed to ensure that this benefit -- as with Sickness Allowance, and Sole Parent pension -- does not become a de facto unemployment benefit but without the work test.  The number of recipients has grown by 9 per cent last year, despite increased review activity.  More regular reviews of those pensioners with lower impairment rates would ensure the speedy return of many of them to the workforce.  Moves by the State Government in Victoria to clamp down on their Workcare system have produced marked results, but some of this success is being carried by extra Commonwealth payments like this one.  Even a meagre 3 per cent cancellation rate, achieved through targeted increased review and more frequent medical checks, would save $90 million p.a.

CHILD CARE

The cost of taxpayer-funded child care is set to explode, as did publicly funded "free" health care in the early 1980s.  Indeed, child care funding has already grown rapidly over the past few years (from $215m in 1989-90 to $535m in 1992-93) and, with election promises, is set to escalate further (to $860 million by 1995-96).

Prime Minister Keating's comment during the election that child care is not welfare could not be further from the truth.  Publicly-funded child care, whether through fee relief, rebates, or operating subsidies, is a blatant example of middle-class welfare.

If the Prime Minister had included a realistic means test on his cash rebates proposal (along the lines of the Family Allowance one), that would have reduced the cost of the proposal by $30-$40 million per annum.

But what is really needed for Child Care is a new approach which links child-care relief directly with the taxation of earnings from employment.  It is the employment status which renders the child care necessary.  The Taxation Institute estimated that a tax rebate could be provided for under $100 million (on top of the then-existing fee relief).  If a rebate was struck at 25 cents in the dollar and claimed through tax, and other fee relief was abolished, the taxpayer would save over $300 million.

RENT ASSISTANCE

In the last Budget the Government abolished the rent assistance waiting period for age and other pensioners and other allowees.  This decision goes against the grain of earlier attempts to target welfare.  This decision should be reversed, which would save $118 million p.a.

Summary

	$m
Unemployment Benefits	350
Migrant Benefits	150
Sole Parents	500
Uniform Age Pension Age	50
3 Week Benefit Wait	150
Removal Liquid Assets Cap	120
Wives of DSP	100
Deferred Pension	100
Age Pension Residency	50
Disability Support Pension	90
Child Care	300
Rent Assistance Waiting Period	118
Total	2078

HEALTH

MEDICAL SERVICES

If Australia is to continue to have a national health care system along the lines of Medicare, there is a strong case for most users of services to pay at least part of the cost.  The earlier proposed (but then abandoned) co-payment for Medicare doctor visits was a worthwhile reform directed towards reducing the usage of medical services (per person usage increased by 15 per cent between 1984-85 and 1990-91) and limiting the cost of public health care.  A co-payment levied at $5 per visit, subject to a $250 per annum family safety net, could yield significant savings and help reduce over-servicing and encourage private health insurance.  Pensioners (who are the greatest users of the system) should pay the charge, but receive an offsetting pension rise as occurred when the $2.50 pharmaceutical charge was introduced a few years ago.  This would ensure that they are not financially worse off, but merely more conscious of the cost of over-frequent doctor visits.  The States should also be able to impose such a charge on their hospital outpatients.  The abandonment of the co-payment was estimated to cost $700 million p.a. within two years.  As that proposal had a $3.50 charge and a $300 p.a. safety net, this proposal at $5 and $250 respectively should save over $1,000 million.

HOSPITALS

With the States' finances under strain they are under pressure to improve the efficiency of public hospitals.  In some States there is scope for significant savings.  At the same time the Federal government as part of its new Medicare agreement is trying to coerce more people into public hospitals by linking funding to the States for the cost of running public hospitals to increases in public hospital patients, but without meeting the full cost of such patients.  However, with the right incentive there is scope to increase the utilisation of private hospitals and ease the pressure on States' budgets.  Encouragement of greater private health insurance would have the twofold benefit of increasing utilisation of under-utilised private hospitals and increasing revenue into the public ones.  A limited tax concession, or perhaps relief from the Medicare Levy for those who pay for private cover, could be used as an incentive.  Either way, a proposal which was revenue neutral to the Commonwealth could be found, offering financial benefits to private insurers.

As part of the efforts to prop up the Medicare system and address the long waiting-lists which inevitably result from the provision of free services, the Government has introduced a number of measures designed to increase public patients numbers.  These "bonuses" send exactly the wrong signals from the taxpayer's perspective.  The Contingency Allocation for Public Hospital Access Pool and Waiting Lists Management programs which form the basis of this proposal should be abolished, saving $220 million.

PHARMACEUTICAL SERVICES AND BENEFITS

Further reform of this major item in health care costs is now needed.  The estimated cost in 1992-93 is $1520 million, up 7.5 per cent on 1991-92.  There is no reason why prescriptions to the public should be subsidised except to genuinely needy people, who because of very costly medical treatments or lack of financial resources cannot afford to pay for them (including the chronically ill).  Abolition of the general subsidy would save $234 million in 1992-93.  This still leaves those entitled to the concessional payment, which at over $1 billion is the biggest component of pharmaceutical costs.

HEALTH PROMOTION PROGRAMS

Many of these programs are lifestyle programs designed to encourage better health or safer sex or drug practices.  There is, however, a strong case for scaling back those that are just advertising campaigns, as distinct from providing medical or related services.  These include the National Community Health Program, National Health Advancement Program, Public Health Program, National Women's Health Program (excluding cancer screening), AIDS and National Drug Strategy.  The combined savings from these programs would be $80 million.

Summary

	$m
Medical Services	1000
Hospitals	220
Pharmaceutical	234
Health Promotion	80
Total	1534

EDUCATION

Responsibility for funding education should mainly rest with the States.  Except perhaps for student assistance, the Federal Government should not directly be involved in funding primary, secondary or tertiary education.  Yet the Commonwealth currently spends $9.2 billion (up $800 million or 10.1 percent on the previous year), including $1.8 billion on Austudy/Abstudy.

STUDENT ASSISTANCE

The explosive growth in student assistance (Austudy/Abstudy) -- nearly 40 per cent ($500 million) in 3 years -- clearly requires remedial action.  The Government's recent decision gradually to lower from 25 to 22 the age of "independence" from the family for Austudy will only add to the problem and will cost $40 million p.a. within 4 years.  ("Independence" enables students to receive higher payments).  This proposal should be reversed and greater emphasis should be placed on assessing "independence", which is already abused.  Total savings combined should be at least $60 million.  Austudy abuse is widely recognised and the House of Representatives Standing Committee found in 1991 that 12 to 27 per cent of students were receiving more than they were entitled to.  Further tightening in this area should save another $40 million p.a.

YOUTH BUREAU

The remnants of the failed Priority One youth programme -- its Youth Bureau and grants -- should also be scrapped, saving an additional $4 million.

FEDERAL OVERSIGHT

The Good Schools Program, Teachers' salary benchmark -- Commonwealth contribution, National Project on the Quality of Teaching and the Students at Risk programme, are classic examples of Canberra's unnecessary intervention in the States' education systems.  Their abolition would save $30 million.

The recently introduced Quality Assurance in Higher Education programme was another attempt to centralise education and "standards" in the enormous Department of Education, Employment and Training empire.  Its demise would save the taxpayer $88 million.

POST SECONDARY

Freeing up higher education, by transferring it to the States and liberalising restrictive tied-funding arrangements, would allow universities to pursue more innovative and flexible finance arrangements.  This would have the dual effect of allowing them to charge fees for students who just miss out (as for foreign students) and to vary the cost of courses -- including top-up fees.  Universities could also more actively involve business and benevolent funds.  Similar arrangements should be made for TAFE.  This would allow TAFE colleges to obtain the enormous growth in funds (an extra $1 billion) which they require.  Introducing this flexibility and transferring responsibility to the States (with adequate offsetting revenue access) should allow funding growth to be pegged back, saving $250 million p.a. in higher education within two years and almost $100 million p.a. in TAFE.

Summary

	$m
Student Assistance	100
Youth Bureau	4
Federal Oversight	118
Post Secondary	350
Total	572

HOUSING AND COMMUNITY AMENITIES

COMMONWEALTH/STATE HOUSING AGREEMENT (C.S.H.A.)

Housing is another function with which the Federal Government need not be involved.  Current expenditure ($960 million) is made through the States in accordance with the Commonwealth/State Housing Agreement.  The funding of construction of public housing is anachronistic.  For the State public housing authorities to be building more homes and acquiring more land for in many cases virtual lifetime tenancies is highly inflexible, costly and outmoded.  There is an immediate need to shift public housing assistance from capital funds to recurrent funding.

This would involve an end to large-scale public housing construction (except in remote areas) and property acquisitions -- the Housing Commissions already own almost $20 billion of housing stock.  The money would instead be used for mortgage and rent relief with greater emphasis placed on meeting short-term support, and management fees for private developments.  The "home for life" concept of public housing, which results in long queues, would be ended.

The Commonwealth should withdraw entirely from housing, leaving it to the States, and hand over funding equivalent to approximately half the current agreement.  If this was then used for recurrent funding, and the States also gradually sold down their public housing stock, they could provide rental assistance to more families in need and reduce their own Budget outlays on this function.  Saving:  $480 million.

OTHER

With the transfer of the housing responsibilities to the States a number of smaller programs could also be terminated.  The abolition of the National Urban Development Program, the National Housing Strategy and costs associated with the Better Cities programme and the Local Government Development Program could save $17 million.

Summary

	$m
CSHA	480
Other	17
Total	497

DEFENCE

There has been much debate overseas about the defence needs of nations in the "new world order".  From Australia's point of view, while we have never had a very large or expensive defence force, we clearly need to maintain a strong defence capability.  However, this does not mean that there is no scope for savings.

COMMERCIALISATION

The Wrigley Report identified savings of up to $350 million p.a. from greater commercialisation of the forces.  The Government has accepted many of the recommendations but the speed of their implementation is very slow.  The extent of commercialisation could also be expanded to cover all non-high security areas.  If this process was hastened and broadened it could bring forward (including additions) savings of $250 million within the next couple of years.

DIARCHY

The diarchy -- the running of two administrations -- is a big "burden" on the Defence Budget.  This results from the development of an armed forces central headquarters and a Departmental one.  There are 15,000 combat personnel, compared with 50,000 service personnel in support roles and half that again in civilian roles.  There should be scope to reduce this bureaucracy and reduce the diarchy.  Such a move could save $100 million p.a. in the first instance, although redundancies would have to be absorbed in earlier years.

Summary

	$m
Commercialisation	250
Diarchy	100
Total	350

CULTURE AND RECREATION

BROADCASTING

The Australian Broadcasting Corporation (ABC) receives over $600 million of taxpayers funds ($500 million directly from the Budget plus $100 million from the Department of Transport and Communications), while the Special Broadcasting Services operates on $62 million and with lower average salaries. ⁽¹⁰⁾  ABC staffing in 1992-93 is estimated at nearly 5,500, about the same as staffing allocated to all foreign affairs and trade activities, over 5 times bigger than the staff of Austrade, and over eight times the staff of SBS.  With the growing range of commercial television and broadcasting, there is a good case to reduce markedly the role of the ABC, which runs an excessive management structure (senior management has almost doubled in three years) and is excessively indulgent in world travel.  The major television and radio networks have had to face cuts of up to 30 per cent in recent years while the ABC has had its funding only slightly reduced in real terns since 1989-90.  A 20 per cent cut to the ABC's direct budget funding would save $100 million.  This saving could be phased in over a couple of years and the ABC could be given greater commercial freedom in pay TV and external financial support.  The SBS has proven remarkably efficient compared to the ABC.  However, this should not make it immune from cuts.  A cut of 10 per cent, or $6 million, would be an appropriate first step to reducing the SBS's reliance on taxpayer support.

The new Australian Broadcasting Authority costs $10 million to run, which is quite excessive when compared to the former Australian Broadcasting Tribunal's high $3 million budget.  The ABA's budget should be pruned to no more than $2 million, saving $8 million, while the $2 million of grants to the Public Broadcasting Foundation should be ended.

NATIONAL COLLECTIONS

These include the Commonwealth national galleries, museums, libraries, archives and the Australian War Memorial.  The total cost of the taxpayer subsidy to these Canberra tourist attractions is $120 million.  Over time, these bodies should be able to raise an increasing proportion of capital costs from public bequests, donations or corporate sponsorships, while operating costs should largely be met by user charges.  A 25 per cent decrease in funding for these bodies should be implemented, saving $30 million p.a. by the third year.

FILM INDUSTRY

The Federal Government has provided extensive financial support to the film industry and the 1992-93 Budget provides $85 million for this purpose.  Australian film makers are clearly now capable of producing good and saleable films and the time has come to wean the infant off the taxpayer teat.  The Government renewed this funding commitment in the last Budget at an average cost of $60 million per annum.  This funding should cease with effect from 1994-95.

ARTS AND HERITAGE

The dominant item of funding within this area is the Australia Council, which has been widely criticised for favoured patronage and personal prejudices.  It dispenses about $48 million of grants and consumes $8 million to undertake this.  As with film, Australian artists and writers have now demonstrated that they are well able to compete internationally and many make reasonable livings from their professions.  The abolition of the Australia Council would save $56 million, and would allow a phasing down of financial support to arts activities generally, including the Opera, Ballet and NIDA.  Not going ahead with Mr Keating's arts election promises would save an extra $20 million p.a.  Total:  $50 million.

SPORT AND RECREATION

This item includes the Australian Institute of Sport -- for training elite athletes -- the highly politicised Community, Cultural, Recreation and Sporting Facilities Program, and the Sport Drug Agency.  The Institute of Sport and Drug Agency should be made independent and self sufficient by way of private contributions from athletes, sponsors and donors.  The Facilities Program is localised pork-barrelling at its worst and should immediately cease.  There is no need for Australia to have State and Federal Sports Ministers, which are just an excuse to throw money and patronage around in an endeavour to buy votes.  The Commonwealth should vacate this arena.  Combined savings:  $77 million.

ENVIRONMENT

The creation of a Federal Environment Protection Authority was another case of duplication with the States, which already have similar bodies.  Whatever the case for environmental regulation to be on a national basis (and that is far from clear), a Federal body should not proceed unless the States agree to abandon the field.  It should be abolished before it gets properly established and starts further discouraging investment.  Saving:  $11 million.

Climate change grants and policy units should also be disbanded, saving $11 million.  Cuts could also be made to the rapidly expanding "ecologically sustainable development" resource programme.  Simply retaining this later programme at 1991-92 levels would save $12 million.  Many of these functions are also performed (and would continue to be) in the Department of Primary Industry and Energy.

The National Parks and Wildlife Service is subsidised to the tune of $55 million.  As many of the parks for which it is responsible are popular tourist attractions it would not be unreasonable to increase (introduce in some cases) user charges for entry and use.  Savings of $11 million (20 per cent) should be feasible.

Summary

	$m
Broadcasting	116
National Collections	30
Film	60
Arts	50
Sport	77
Environment	45
Total	378

TRANSPORT AND COMMUNICATIONS

URBAN PUBLIC TRANSPORT

The Urban Public Transport programme provides funds to the States to prop up ailing and inefficient public transport systems, many of whose loss-making activities should be privatised or closed down.  This is another example of unnecessary duplication.  The programme costs $72 million, which should be saved.

RAILWAYS

The Australian National Railways Commission continues to receive a $59 million subsidy to run unprofitable routes mainly in South Australia and Tasmania.  If it cannot make them profitable then alternative transport should be found for these areas and the rail service terminated.  The subsidy should initially be halved (to $29 million) then cease altogether.  Saving:  $30 million.

SHIPPING

The Tasmanian Freight Equalisation Scheme is an ongoing subsidy to shipping costs between Tasmania and the mainland.  There can be no continuing justification for this impost.  Saving:  $34 million.

AVIATION

The Civil Aviation Authority should immediately move to full cost recovery.  The Government had initially proposed this but has subsequently delayed it.  It will save $24 million in 1993-94.

Summary

	$m
Urban Public Transport	72
Railways	30
Shipping	34
Aviation	24
Total	160

INDUSTRY ASSISTANCE AND DEVELOPMENT

The growing emphasis on the importance of adopting international best practice in industry, and the continued phasing-down of tariffs and increasing reliance on the exchange rate as a natural protector, suggests that there should be a phasing-down of programs in this area.

INDUSTRY PROGRAMS

The industry area is full of small, targeted special assistance schemes and bodies most of which are difficult to justify.  The Australian Manufacturing Council and the Automotive Industry Authority should be abolished saving $4 million.

Particularly now that an export "culture" appears to have become established in manufacturing industry, the special assistance programs for various sectors (from Information Technology to Agri Food Industry to Shipbuilding to Printing to Pharmaceutical) should either be terminated completely, or at least cut back.  Current outlays are over $300 million.  Savings of 30 percent, $100 million, should be achievable within a short space of time.  The National Industry Extension Service should be handed entirely to the States, saving $5 million.

TOURISM

A greater private sector contribution for the Australian Tourist Commission would be justified to ensure the budget is being effectively targeted by those who stand to gain from the expensive promotions.  A 50/50 funding basis -- as opposed to the current 80(public)/ 20(private) -- would save the taxpayer $30 million.  The new Department of Tourism should be wound up, saving a further $6 million.

ASSISTANCE TO EXPORTERS

The two major forms of support in this area are from Austrade promotions and the Export Market Development Grants Scheme (EMDGS).  These two programs cost $120 million and $180 million respectively.  Austrade under its new management has been going through a major process of improvement in recent years after a damning McKinsey report on its activities.  There is still room for greater cost recovery in particular, and for cost savings with the Department of Trade and business organisations.  Savings of $30 million should be possible from active pursuit of these ends.  The EMDGS has recently had its guidelines broadened to allow continued access in particular after 8 years.  These grants should be better targeted to helping firms crack into their early export markets.  They should not be an ongoing form of assistance or subsidy.  This stricter criterion would be more appropriate for the scheme and save about $20 million.

Summary

	$m
Industry Programs	109
Tourism	36
Exporters	50
Total	195

LABOUR AND EMPLOYMENT

As indicated, the increase in unemployment during the 1980s importantly reflects the increase in the proportion of the working population seeking work.  One factor in that increase is the greatly increased spending on programmes of various kinds designed to help people find employment.  While, therefore, the reasons for the increased unemployment are complex, the evident failure of these programs suggests that the solution to the problem may largely lie elsewhere, particularly in reforming the labour market.

LABOUR MARKET ASSISTANCE

While Australia has high structural (as well as cyclical) unemployment, there is a need to help retrain some people or they will not be able to regain employment.  Unfortunately, most of the government-sponsored labour market programs have comparatively poor records with respect to improving employment prospects and there is a substantial element of shuffling the unemployment pack.  For instance, the largest programme, Jobtrain, has a success rate of only 20 per cent.  For an outlay of over $200 million this is poor.  This programme was also highly criticised by the Auditor-General for its inability to provide the appropriate skills to assist job seekers find employment.  This programme should be halved, saving $114 million, and if its success rate does not improve it should be dropped altogether.

Another programme of limited value is the Jobstart programme, which basically provides a subsidy to an employer because the cost of the employee's labour is too high.  This situation has arisen because of the lack of flexibility in labour relations.  It is an absurdity for other workers who are being paid what they are worth to have to pay taxes so a privileged group of fellow workers can be paid the same wages, even though by definition the employer (and the Government) considers them to be worth less.  In the face of acceptance by the Prime Minister of the need for enterprise-based employment relations, this problem of award inflexibility should be addressed, therefore making wage subsidies unnecessary.  Total savings:  $160 million.

The Australian Youth Initiative Grants should cease.  Young people should not need a government hand out to show initiative.  Saving:  $6 million.

The New Enterprise Incentive Scheme is another programme which, according to the Budget Papers, "provides income support and training to assist unemployed people set up small business ventures".  However, with small business bankruptcies running at 17,000 per annum, this poses obvious difficulties for the unemployed.  The scheme costs over $11,000 per participant.  As banks and other lending institutions are now liberalising their lending practices (with $140 million from the Reserve Bank to help), genuine business possibilities should be able to receive backing from that quarter.  The abolition of this programme will save $31 million.

INDUSTRIAL RELATIONS

With the increasing move towards enterprise bargaining, the justification for a large corporatist based industrial relations department and related activities is rapidly disappearing.  Industrial relations agencies are still projected to employ 1700-1800 persons and are still expected to consume $260 million annually for the next few years.  With the exception of the cost of the Industrial Relations Commission -- which should be declining in future years, but isn't, and the Special Industry Services (which are fully funded by levies) -- the rest of the expenditure could be abolished.

This would result in an end to workplace reform payments (which are another form of grant to trade unions), the closure or sale of the Trade Union Training Authority (annual cost $10 million), a major reduction in advisory services and abolition of the Affirmative Action Agency and the Construction Industry Development Agency.  Total savings:  $90 million.

The National Occupational Health and Safety Commission should have its responsibilities handed back to the States' respective bodies, thus saving an extra $20 million.

EMPLOYMENT SERVICES

The Commonwealth Employment Service (CES) is one of the larger and more expensive government agencies.  It is estimated to cost $446 million in 1992-93 (an 18 per cent increase over the previous year) and involve 8,800 staff years.  With the recession, and its new responsibility for NEWSTART, its size has increased dramatically.  The CES is not viewed very positively by employers -- hence the multimillion dollar advertising campaign to try to remedy this -- nor by clients -- who are cynical of success through this body.  The decision to move NEWSTART to CES from DSS was also a mistake, and a costly one at that.  DSS is relatively efficient at processing and dealing with welfare issues;  by comparison CES is not.  The CES and DSS should be merged into one larger body which can administer welfare payments and related activities.  The CES's job placement function should be contracted out to private sector employment agencies.  They could be put up to tender with a success fee.  Such a proposal has been supported by DSS, who claim major savings can be made.  It has naturally been resisted by DEET (the department responsible for the CES).  Savings arising would be at least $150 million.

IMMIGRATION

The Department of Immigration appears to be overloaded trying to deal with boat people, Chinese students and numerous changes in procedures, regulations and court appeals.  The recent decision to call in the Federal Police to investigate institutionalised bias in decisions reveals great strain.  While savings from staff reduction would seem out of the question, there is scope to increase cost recovery for migration to a full cost basis for all non-refugee or humanitarian cases.  This would increase cost recovery by $20 million.  Action should also be taken to reduce the generous procedural machinery available to appellants against bureaucratic decisions.

Summary

	$m
Labour Market Programs	311
Industrial Relations	110
Employment Services	150
Immigration	20
Total	591

PRIME MINISTER

The Department of Prime Minister and Cabinet has been the dumping place for a whole heap of minority interests and past pet projects.  It needs a good clean-out, which could begin with the abolition of a number of quangos.  The Office of the Status of Women ($4m), the Office of Multicultural Affairs ($5m), Council for Reconciliation ($5m), Resource Assessment Commission ($8m), and the Australian Science and Technology Council ($4m) should all be axed and the functions returned to relevant departments, providing a combined saving of $26 million.

The Public Service Commission, which has grown from $9 million in 1989-90 to $23 million in 1990-91, should be cut back to no more than $5 million, saving $18 million.

Summary

	$m
Quangoes	26
Public Service Commission	18
Total	44

ABORIGINAL AND TORRES STRAIT ISLANDER AFFAIRS

There is no evidence that the billions of dollars expended on Aboriginal programs over the past two decades has made a worthwhile contribution to reducing the economic, social and health problems which are experienced by many (but not all) Aborigines.  While there may have been improvements in a few specific areas (such as a decline in infant mortality), the overall situation may even have deteriorated.  This suggests the need for a fundamental review based not on the false and dangerous stereotyping that people are disadvantaged simply by being Aboriginal, but on targeting people who are actually disadvantaged.  Programs should also be designed to integrate Aborigines within main-stream Australian life, rather than encouraging them to see themselves as separate from other Australians.  A classic example is the allocation of more than $1 million over five years to create a Tasmanian Aboriginal language.

A.T.S.I.C.

The Aboriginal and Torres Strait Islander Commission (ATSIC) is the main Aboriginal programmes funding body.  It replaced the Department of Aboriginal Affairs and subsumed most of its functions.  It has increased its budget from $600 million in 1990-91 to an estimated $932 million in 1993-94, including a 24 per cent increase this financial year.  While many of the programs undertaken by ATSIC may be beneficial, its consumption of funds is extraordinary, particularly as it does not even include Abstudy.  A cap must be placed on its expenditure which has been widely criticised as wasteful, misdirected or simply ineffective.  It clearly needs to be better targeted at overcoming real problems confronting Aboriginal people.  An administration which uses over 10 per cent of the resources does not assist.  ATSIC funding should be pegged at 1992-93 year levels, which would save $100 million in 1993-94 and an additional $60 million the next year.  Within this budget ATSIC could continue to determine its own expenditure priorities but stricter accountability and auditing should be implemented.

ABSTUDY

Abstudy is the Aboriginal version of Austudy.  It is a racially discriminatory student assistance scheme in that it denies non-Aboriginals access to its benefits.  It is also discriminatory in terms of tests for eligibility;  i.e., it's easier to qualify -- there is no assets (or Aboriginality) test for instance -- and it is financially more generous, by providing additional assistance for school fees.  In times when all Australians wish to remove bastions of discrimination, either in race or sex or age, there can be no case for maintaining a racially based student assistance scheme.  Aboriginal Australian students should be eligible for the same assistance as other Australian students.  Abstudy should be merged into Austudy with Austudy guidelines being applicable.  Such a move would save in the order of $30 million.

ROYAL COMMISSION RESPONSE

The Government's main response to the findings of the Royal Commission into the Deaths of Aboriginals in Custody has been to provide more funding instead of re-orienting Aboriginal programmes.  This "response" is scheduled to cost an additional $130 million next year, on top of the already $1 billion plus spent on Aboriginal people.  A much closer review of these spending priorities is needed in conjunction with the proposed cuts in ATSIC itself.  This money should be limited to predominantly health funds at half the current projections.  Saving:  $50 million.

Summary

	$m
ATSIC	100
Abstudy	30
Royal Commission	50
Total	180

OTHER ECONOMIC SERVICES

The functions of the Prices Surveillance Authority and the Federal Bureau of Consumer Affairs can be undertaken elsewhere.  The former's role is duplicated by both the new competition function of the Trade Practices Commission (now in Treasury) and the Industry Commission.  The Federal Bureau of Consumer Affairs is another duplicating body -- this time with the States -- which provides grants to special interest groups.  Their abolition would save $5 million.

Summary

	$m
Total	5

LEGISLATIVE SERVICES

This item is the servicing of Parliament.  It includes salaries and support for Members and Senators, Presiding Officers, Hansard and Parliament House itself.  The largest component of this $300 million item is the Department of Administrative Services parliamentary and ministerial services branch at a cost of around $140 million.  This works out at over $600,000 per MP -- and that does not include their salaries (starting at around $67,000 for back-benchers) which are paid out of separate Budget items.  A 10 per cent cut across the board on these expenses would save $30 million and the MPs should still be able to cope adequately.  The first item for saving could be the termination of the lifetime Gold Pass.

Summary

	$m
Total	30

LAW, ORDER AND PUBLIC SAFETY

The Law Reform Commission, Human Rights and Equal Opportunity Commission (HREOC), Australian Institute of Criminology, National Crime Authority, the Australian Transaction Reports and Analysis Centre (ATRAC, formerly the Cash Transactions Reports Agency) should all be abolished and their functions passed back to appropriate departments or authorities.  The HREOC and the Law Reform Commission do not add anything to the Australian legal system -- if anything they tend to undermine it.  The National Crime Authority was set up to catch big-time criminals who fell through the net.  It duplicates functions of the Australian Federal Police, Australian Securities Commission and State bodies.  It proved to be very unsuccessful in the 1980s and its demise would not be noticed.  The Institute of Criminology performs work done by police forces, the Australian Bureau of Statistics and universities.  Any residual function it has could be adequately handled by those bodies.  The ATRAC has already undergone a name change but what was really needed was extermination.  This body is a very costly and burdensome imposition on banks, customs authorities and individuals undertaking normal ordinary business.  It has, like some of these other bodies, failed to live up to its supposed role -- identifying crooks.  The combined savings from killing off these quangos would be $71 million.

Summary

	$m
Total	71

FOREIGN AFFAIRS AND OVERSEAS AID

Australia has a total foreign aid budget of almost $1400 million, plus another $600 million on foreign affairs (non-aid) related expenditure.  With continued conflicts in former Yugoslavia and Cambodia there will be pressure for more funding.  However, Australia has a major budgetary problem which needs to be addressed.  There is a bottomless barrel of worthy overseas aid projects and more attention is needed to prioritising the use of aid resources and to recognising that the best contribution Australia can make in assisting the world's developing nations is by allowing them freedom to trade with US.

Some $390 million in 1993-94 is earmarked for multilateral organisations (including the United Nations, the Commonwealth, the World Bank, the Asian Development Bank and the European Bank for Reconstruction and Development).  These bodies have high levels of expenditure on their staff and headquarters.  For example, recent reports indicate that the European Bank for Reconstruction and Development spent more money ($425 million) on its head office in its first 20 months than it spent on providing loans and investments in Eastern Europe, are particularly notable.  Australia's contribution to the Bank last year was over $7 million.  Australia should cut its expenditure in this area initially by 20 per cent and perhaps further if things do not improve.  Savings:  $78 million.

Further savings can be made by reducing our contributions to international organisations, like UNESCO and the World Health Organisation, which either have a history of not using resources efficiently or whose need seems to have diminished.  Outlays in this area are $60 million.  At least a $10 million saving would be easily attained upon review.

General Administration soaks up a further $450 million.  A 10 per cent saving in this area should be achievable by reorganising our overseas posts with greater attention to priorities now, as opposed to 30 years ago.  There is questionable justification for maintaining 8 posts in the USA, 3 in Paris, 4 in Switzerland and 3 in Germany and the largest single post in London, when our opportunities are developing in Asia, South America and Eastern Europe.  Particular attention should also be paid to reducing the AIDAB local administration -- perhaps one third of the total $45 million savings.

This leaves the largest part of the budget, which is bilateral aid.  Papua New Guinea receives $249 million, which, although reduced from $270 million two years earlier, still seems excessive.  Areas of emergency aid, refugee relief and non-government organisations should be left untouched.  One major item which should be cut sharply, or preferably abandoned, is the Development Import Finance Facility (DIFF).  This is a poor form of industry assistance which is paid to a few very large Australian companies who should not need taxpayer handouts to export their products and expertise.  It should be phased out expeditiously, saving over $100 million.  Further prioritising of expenditure and some reduction in PNG aid would provide total savings under this heading of $150 million (including DIFF).

Summary

	$m
Multilateral aid	78
Organisations	10
Administration	45
Bilateral aid	150
Total	5

GENERAL AND SCIENTIFIC RESEARCH, NEC

C.S.I.R.O.

The Commonwealth Scientific and Industrial Research Organisation (CSIRO) makes an outstanding contribution to Australia's technological knowledge and advancement.  That contribution has increasingly been recognised by private sector funding for projects.  This direction should be further pursued.  Raising external funding by 10 per cent (from the current 30 per cent to 40 per cent) would save $40 million.

AUSTRALIAN RESEARCH COUNCIL

The Australian Research Council (ARC) is the biggest grants body the Commonwealth has at its disposal.  In 1993-94 it will hand out $293 million.  Real funding to the ARC has grown by 238 per cent in 10 years.  While most of the grants provided are for worthwhile activities, some are politically inspired, e.g., greenhouse issues, and do not reflect a balanced national interest.  The body is also far too centralised and has removed much of the universities' independence in this important area.  A closer review, tighter guidelines, and more decentralised decisions should be able better to direct this funding at a lower cost.  Saving:  $40 million.

CO-OPERATIVE RESEARCH CENTRES

The Government seems to have gone overboard with its support for the new Co-operative Research Centres programme.  There were initially going to be 50 such centres (a lot for an untried programme) over three selection stages, which are almost complete.  Then, in his "Investing in the Nation" statement, Prime Minister Keating announced another 10 would be added.  The total cost of these additional ones will be $25 million within two years.  The original 50 should proceed but these extra 10 should not, pending assessment of the success or otherwise of the first 50.  Saving:  $25 million from Forward Estimates.

Summary

	$m
CSIRO	40
ARC	40
CRCs	25
Total	105

ADMINISTRATIVE SERVICES

OFFICE CONSTRUCTIONS

The first item on which to save money in this area is the ridiculous programme decision to taxpayer-fund the construction of more office buildings.  When all Australia's capital cities (even including Canberra) have excess office space it is nonsensical to start building more.  These constructions should be terminated immediately, if practicable.  This would save $148 million in 1993-94.

EFFICIENCY DIVIDEND

Departments are currently subject to a 1.25 per cent efficiency dividend to try to induce productivity improvements and reduce their running costs.  This charge has had limited effect as the Government regularly exempts bodies altogether -- like the ABC -- or it rearranges them and assigns additional resources.  The average annual increase in running costs over the last 3 years has been 5.4 per cent real, reflecting the strong growth in public service employment.  Also, the conclusion of an "enterprise bargaining" agreement with 150,000 Federal public servants in November 1992 provided for a 5 percent wage increase largely in anticipation of "productivity" offsets and appeared to have a considerable window-dressing component.  There should be a renewed drive to reduce running costs in the departments and agencies, by introducing a special additional 2.5 per cent efficiency dividend for next year.  This would be on top of the existing 1.25 per cent and apply to all programmes not already subject to cuts outlined elsewhere.  This measure would save about $230 million.

COMMERCIALISATION

The Department of Administrative Services (DAS) runs a number of Common Business Services which provide services on a more-or-less commercial basis to predominantly government departments.  While these services have become more competitive in recent years, there still appears to be scope for further commercialisation and eventual privatisation of them.  Sale of them even to employees would have the dual benefit of improving management and resource flexibility while also removing a large number of public employees from the public superannuation scheme.  However, such services should be opened to public tender.  These bodies include:  Comcar, Fleet, Australian Property Group, Project Services and Interiors, Asset Services, Overseas Property, Australian Government Publishing Service, DAS Removals and Distribution, Australian Valuation Office, Australian Government Analytical Laboratories, Australian Protective Services, and the Australian Survey and Land Information Group.  While it is difficult to obtain accurate information on their various profitability levels, there is undoubtedly room for further improvement.  With gross income of $875 million, a 10 per cent profit improvement would save $87 million.

NATIONAL MEDIA LIAISON SERVICE

The National Media Liaison Service costs $2 million.  It is little more than a Government propaganda unit which the taxpayer should not fund.

COMMONWEALTH SUPERANNUATION

Public servants' superannuation entitlements are relatively generous, with indexed pensions for most.  Particularly given the move towards employing public servants on a contractual basis similar to that for private sector employees, and the increased politicisation of public services, the case for more generous superannuation than in the private sector is diminished.  The cost of retired public servants benefits is estimated to be $1,278 million in 1993-94.  This figure is rising sharply and will be $1,735 million by 1995-96 (two years away).  The Commonwealth needs to take action to reduce the future liability on working Australians.  The new superannuation scheme introduced in 1990 -- with a lump sum payment -- is estimated to eventually save $800 million.  But moves should be made now to reduce the superannuation entitlements of future public servants to the legislated minimum SGC requirement, as the New South Wales Government has done.  This could save hundreds of millions of dollars in future years.

Summary

	$m
Office Constructions	148
Efficiency Dividend	230
Commercialisation	87
NMLS	2
Commonwealth Superannuation	-
Total	467

ASSISTANCE TO OTHER GOVERNMENTS

STATES

The parlous state of Victoria's, South Australia's and Tasmania's finances, in particular, makes it difficult to cut general revenue grants to the States in the immediate future.  In any event, 1993-94 is the final year of the three-year arrangement providing for a real terms guarantee and it would seem appropriate to maintain that arrangement for that year.  But it should be strictly maintained and no "special" additional assistance should be provided, as was the case in 1992-93.  Beyond 1993-94, the general revenue grants should be provided on a basis which puts pressure on the States to implement productivity-improving measures in the delivery of their services.  A "formula" for determining such grants on that basis needs to be worked out in co-operation with the States.

LOCAL GOVERNMENT

The Commonwealth should get out of this area of funding altogether.  Despite repeated attempts (the last one in 1988) to have local government recognised in the Constitution, the Australian electorate has been astute enough to realise that, with a good deal of wasteful expenditure being undertaken to operate an excessive number of councils, the greatest need is for reform (even abolition) rather than specific constitutional recognition.  The responsibility for funding local government should entirely be borne by its creators -- the States.  Commensurate funding equal to 80 per cent (so they are forced to downsize) of its current level (excluding identified road grants) should be provided to the States in additional general revenue grants.  Saving $153 million in 1993-94.

BETTER CITIES

The Building Better Cities programme is completely inappropriate in this economic climate.  It was designed to improve urban infrastructure -- an area of State responsibility.  $200 million is the estimated outlay for 1993-94.  Half of this should be saved and the remainder paid out to complete worthwhile projects.  Saving:  $100 million.

Summary

	$m
States	-
Local Government	153
Better Cities	100
Total	253

PUBLIC DEBT INTEREST

All the savings outlined above will have the positive effect of reducing the Commonwealth's public borrowing requirement and hence its subsequent debt interest costs.  While such costs have come down sharply as interest rates have fallen, that process is now reversing as borrowing increases.  The public debt interest cost from Commonwealth borrowing was forecast in the last Budget to rise from $3.9 billion in 1991-92 to $5.0 billion in the current year and to reach a whopping $8.0 billion by 1994-95.  This calculation was prior to taking account of election promises -- costing approximately $1,300 million in 1993-94.

The interest saving from this savings package of $8 billion would be of the order of $500 million within three years.

PRIVATISATION

Privatisation is a crucial part of any genuine micro-economic reform.  Organisations like Telecom, the Federal Airport Corporation (FAC), the Commonwealth Bank, etc., need the commercial freedom to operate in their respective competitive markets.  These bodies should be added to the Government's existing privatisation list, which includes:-

• 19 per cent of Commonwealth Bank ($1000m)
• 100 per cent of Qantas/Australian ($2000m approx.)
• Australian National Line
• Housing Loans Insurance Corporation ($110m)
• Uranium Stockpile
• Commonwealth interests in the War Service Land Settlement Scheme

The process of privatisation should be speeded up, and the organisations themselves should play a more active role in their final financial structure.  Employee share ownership should also be high on the agenda for the sale of these bodies.  The non-committed part of the Commonwealth Bank (50 per cent) -- the Prime Minister has already announced the sale of an additional 19 per cent -- would be worth close to $3 billion.  While the value of Telecom was hotly debated during the recent election campaign, it would conservatively be worth $15 billion.  The FAC may need to be broken up before sale -- to ensure competition -- but its various airports should be worth upwards of $500 million.  These assets should not be rushed onto the market, but a professional sale timetable should accommodate the remainder of the Commonwealth Bank, most of the FAC and either a third or half of Telecom within the next three years.  The interest savings on government debt from such a sell-off would be of the order of $600 million per year by the end of the third year.

CONCLUSION

The savings outlined in this document provide tangible examples of the (large) expenditure reductions which are available to the Government as a means of eliminating the structural Commonwealth Budget deficit.  There is also scope to obtain significant additional proceeds from privatisation beyond the asset sales already foreshadowed.

Nearly all of the savings could be achieved within a year or two.  Some longer term ones, like sole parent pensions, would take a little longer, but nevertheless should be introduced now.

Savings of the magnitude indicated here would provide a boost to national savings and assist Australia's economic recovery.

Table 1:  Commonwealth General Government Outlays

	GDP (1)	Own Purpose Outlays		Assistance to States		Total Outlays
	$M	$M	%GDP	$M	%GDP	$M	%GDP
1982-83	171,849	29,888	17.4	16,507	9.6	49.501	28.8
1983-84	194,883	35,305	18.1	18,962	9.7	57,365	29.4
1984-85	216,257	40,775	18.9	20,638	9.5	64,876	30.0
1985-86	240,224	45,580	19.0	21,994	9.2	71,011	29.6
1986-87	264,488	49,820	18.8	23,273	8.8	76,405	28.9
1987-88	298,266	51,923	17.4	23,871	8.0	79,427	26.6
1988-89	339,582	54,966	16.2	24,173	7.1	82,750	24.4
1989-90	369,897	58,863	15.9	26,045	7.0	88,100	23.8
1990-91	379,262	66,007	17.4	26,694	7.0	96,691	25.5
1991-92	386,283	72,769	18.8	26,804	6.9	103,505	26.8
1992-93   Budget   Revised	409,073 405,210	78,356 78,900	19.2 19.5	29,542 29,300	7.2 7.2	110,688 111,300	27.1 27.5

Source:  ABS 5501.0, 18 Nov 1992 for outlays from 1987-88 to 1992-93 (except 1992-93 Rev which are my estimates based on Mid Year Review revised Budget estimates).  For outlays prior to 1987-88, data supplied by ABS.  GDP (l) figures are from 5206.0, 18 March 1993 except for 1982-83 and 1983-84 figures which were supplied by ABS.

Notes:

(i) Commonwealth "General Government" outlays are slightly higher than "Budget" outlays as the latter do not include certain primarily off-Budget activities (such as the ABC).

(ii) The sum of own purpose outlays and assistance to the States does not add to the total because these items do not include Commonwealth payments to public trading enterprises or other interest payments in respect of loans raised on behalf of the States (for which the Commonwealth is fully reimbursed).

Table 2:  Commonwealth Budget Outlays -- Government Estimates ($ billion)

	1991-92 Outcome	1992-93 Budget (1)	1992-93 Rev. (2)	1993-94 Rev. (2)	1994-95 Rev. (2)	1995-96 Rev. (2)	1996-97 Rev. (2)
Outlays (excl. Asset Sales)	102.3	111.5	111.7	119.4	n.a.	n.a.	n.a.
% Incr. (Real)	4.9	5.9	6.5	3.6	n.a.	n.a.	n.a.
% of GDP	26.6	27.4	27.7	27.8	n.a.	n.a.	n.a.
Asset Sales	0.3	-1.6	-1.1	-2.9	n.a.	n.a.	n.a.
Total Outlays	102.6	109.9	110.5	116.5	120.4	126.4	131.3
% Inc. (Real)	5.4	4.1	5.1	2.2	0.3	1.7	0.6
% GDP	26.7	27.0	27.4	27.2	26.2	25.7	24.9
(1) Budget time estimates. (2) Mid-Year Review (10 Feb 1993) incorporating "Investing In The Nation" initiatives and revised estimates of economic growth and inflation as follows:
Implied GDP (A)	384.4	407.0	403.4	428.2	459.5	491.8	527.3
Implied % Inc Nominal GDP		5.9	4.9	6.1	7.3	7.0	7.2
Implied % Incr. Real GDP		3.0	2.4	2.9	4.1	3.7	3.8
Implied % Non-Farm GDP Deflator		2.8	2.4	3.1	3.0	3.2	3.3

Note:  These figures exclude the effect of some of the promises made in the election campaign, which are estimated to add $323m, $583m and $477m to outlays in 1993-94, 1994-95 and 1995-96 respectively.

---

ENDNOTES

1.  See Reserve Bank Bulletin, April 1993, page 21.  The "underlying" estimate excludes asset sales.

2.  Of course, as the "underlying" PSBR was a surplus of about 1.4 per cent in 1988-89, the deterioration since then is over 7 percentage points of GDP.

3.  Over the same period that Commonwealth outlays grew by 16 per cent real, the economy has grown by less than 2 per cent.

4.  In the One Nation statement of February 1992, Prime Minister Keating said:  "As I said at the outset, we have a plan for Australia -- a big plan.  With our strategy, within four years the Federal Budget will return to surplus, and we will have created 800,000 jobs clipping 3 percentage points off unemployment".

5.  That is, the reduction in the deficit from the present 4 per cent of GDP to 1 per cent of GDP in 1996-97 after allowing for the effect of personal income tax cuts, which would be equivalent to about 1.5 per cent of GDP in 1996-97.  Of course, there is enormous difficulty in estimating the cyclical component in the deficit in the likely changed circumstances of continued high unemployment and low inflation in the 1990s.  In particular, the growth in GDP implied by the Government's projections of outlays to 1996-97 suggests that the rate of unemployment -- hitherto the most important cyclical influence on outlays -- would be unlikely to fall significantly from present levels.  This implication appears to be borne out by the Prime Minister's remarks on 21 April 1993 to the Institute of Directors, when he said that "It is an undeniable fact that unemployment is not going to fall dramatically in the next few years, and equally undeniable is the fact that long term unemployment will increase".

6.  The Canadian Finance Minister put considerable emphasis on the fact that the deficit was being reduced by spending cuts and not by tax increases.  "The right way to get the deficit down is by cutting spending.  The right way to get revenues up is to encourage more economic growth, and you can't do that by raising taxes."

7.  "General government" outlays differ slightly from budget outlays in that they include certain Commonwealth activities which are not fully reflected in the budget (such as the ABC).

8.  When he was Treasurer, Mr Keating often criticised the 1982-83 budget of the Fraser Government as irresponsible.  If Commonwealth own purpose outlays in 1992-93 were the same proportion GDP as in 1982-83, they would be about $8.4 billion lower.  If Commonwealth assistance to the States was the same proportion of GDP as in 1982-83, it would be about $9.6 billion higher in 1992-93.

9.  Renamed Job Search Allowance.

10.  Estimated ABC average salaries in 1992-93 are $50,792 compared with $38,923 for SBS.