Executive Summary

EXECUTIVE SUMMARY

Foundations for the Commission's approach

In examining the Commonwealth Government's finances as required by its terms of reference, the National Commission of Audit (the Commission) has proceeded from three basic premises.

The first is that governments do need to operate efficiently. Governments use scarce resources, the good management of which helps everybody. Efficient governments are not less compassionate. Unless a government uses resources prudently, its ability to achieve social policy goals will eventually suffer as the need to correct financial mismanagement becomes more important. In such cases, all of the community, including its most vulnerable members, end up paying. Australian governments know this from experience. A government operating efficiently can better look after the interests of those in real need on a sustainable basis, undistracted by pressure to take harsh measures to restore its finances.

The second premise is that the community would prefer action to make delivery of services more efficient rather than cutting assistance to those in genuine need. The Commission considers that the community would prefer maintenance of activities that only governments can carry out properly, and winding back activities that can be better performed by others. Both of these judgments reflect the view that governments have a range of economic and social activities that are their 'core business'. Helping those in need and establishing a framework of stability through provision of law and order are central amongst such activities.

The final premise is that well managed government contributes to a more competitive Australia. Efficient government minimises demands for taxation and other revenue. It minimises effects on the cost structure of Australian business. This helps ensure Australia is internationally competitive. More Australians can then help themselves, and rely less on others' savings. More saving is needed to help finance the strong investment we require to support higher rates of economic and employment growth. The Commonwealth Government can lead by example, moving its own budget from deficit into surplus.

What is this report about?

The Commission is required to examine aspects of what the Commonwealth Government does, how it does it, how its activities are recorded, and the implications for its financial position. Where necessary, the Commission has been asked to suggest improvements.

There has not been a fundamental assessment of the Commonwealth Government's priorities using a rigorous and consistent set of principles applied across the broad spectrum of government activity for many years. However, such wide ranging reviews have been undertaken by other countries (for example, New Zealand) and State governments (for example, Victoria and New South Wales). Furthermore, many of Australia's major businesses, after comprehensive reviews, have been forced to undertake major restructures to meet increased international and domestic competition. These reviews have sought to fundamentally change organisations to enable them to concentrate on their core activities, to withdraw from activities that do not add value, to clearly establish their goals and to maximise their effectiveness and efficiency.

Over time, the performance of government programs may deteriorate unless regularly assessed. In some cases, the unintended consequences of programs may be to impact most inequitably on those they were intended to help. Despite the best of intentions, governments often effectively abandon the price mechanism which not only causes resources to be misallocated but can lead to the neediest benefiting least and the better off, or those plugged into the political networks, doing best.

It is timely for such a fundamental review at the Commonwealth level. The Commission's report looks at the following questions:

Doing things better is a prerequisite for stronger economic and employment growth. Australia must compete on world markets. Increasing engagement with Asia reinforces this point. Private sector businesses and individuals must seek out 'best practice' ways of operating to prosper. Governments should not be excluded from such pressures to perform.

Governments are both different from the private sector and similar to it:

Government activities, directly or indirectly, affect the way in which private individuals and businesses perform. They compete with the private sector for resources. So governments need to ensure their activities are 'best practice', otherwise the whole economy suffers.

Some common sense principles

The Commission has adopted a framework of principles, cognisant of the broad economic and social goals of government, to guide its analysis and recommendations for improvements. This framework includes the following decision sequence:

What is government's role?

Governments have an indispensable role to play in modern democratic economies. The things that governments should do lie at the heart of this role. Community expectations about what governments can do and how they should operate have changed since the 1970s and 1980s.

The things that governments should do can be grouped into two broad categories.

The first concerns social or equity goals that the community wants pursued. This covers such issues as helping the genuinely needy, redistributing income, ensuring access to basic levels of education, health care and housing, and achieving greater equality of opportunity through social justice policies.

The second category covers situations where, in the absence of government involvement, the actions of private individuals would result in inefficiencies such as insufficient or excessive production or consumption of certain commodities (for example, on the insufficient side, national defence or basic education, and on the excessive side, pollution or harmful drugs).

In short, governments have a central role in the community because they can set rules that specify people's rights and responsibilities. This role, which includes power to impose taxation to fund their activities, is the most crucial thing that democratic governments do.

Are governments specifying goals and dividing up responsibilities in the most effective way?

Where governments have important roles to play, the Commission considers that some obvious design rules should apply for good management:

Is the Commonwealth Government operating on a 'best practice' basis?

There is now greater appreciation that governments can produce better results if they operate more like referees and supervisors, specifying the rules and the results required. Delivery of desired outcomes is usually better if opened up to competition, so that suppliers within and outside the public sector can tender for the services required. Those setting the rules and desired outcomes where possible should be separate from those supplying the services. Referees shouldn't be players as well, and vice versa.

The Commission considers that there are three requirements for 'best practice' operations:

Is the Commonwealth Government playing to its strengths?

Decisions about Commonwealth Government involvement are for the government of the day. However, the Commission considers that it is timely for the Government to undertake a fundamental review of all its activities, against the framework of principles set out above. Some examples follow.

Assistance to individuals and business: illustrative Commonwealth expenditure programs

Subsidies to business operations often include programs where the benefits of success are able to be captured by the business itself without other benefits to the community. There are also subsidies to individuals who are unlikely to be classified as people in genuine need. Examples are:

Assistance to individuals and business: Commonwealth tax expenditures (tax concessions)

The Commission considers that tax expenditures are a less transparent, more open-ended, but otherwise equivalent mechanism to public sector expenditures for providing assistance to individuals and business. Many may help those able to help themselves, or may be the source of discriminatory treatment as between competing business activities. Examples are:

Because tax expenditures have not been subjected to the same degree of scrutiny as budget expenditures in the past, there should be a comprehensive review of all such expenditures as soon as possible to establish the case for them, and their effectiveness and efficiency, as well as their potential for generating pressure on Commonwealth finances. Consideration should also be given to converting remaining tax expenditures to outlay programs.

Government business enterprises

Government business enterprises (GBEs) whose objectives are to provide goods and services on a commercial basis should only be retained in public ownership if there is a clear public interest case to do so. The Commonwealth Government should review the need for continuing government ownership of all GBEs. The Commission considers that the following examples do not meet this public interest test:

Government services

The Commission considers that government involvement in the provision of services to other government agencies or to the public should be reconsidered because it believes that these services, or a significant component of them, can better be provided by the private sector. Examples include:

Commonwealth/State government roles: sorting out who does what

The Commonwealth/State government interface is complex. At present, its main features are:

The Commission considers that the current financial arrangements between the Commonwealth and the States, in particular the proliferation of SPPs, are the source of:

Changes to the Commonwealth/State interface, given current revenue raising powers, should be guided by the following principles:

The Commission recommends the following changes to Commonwealth/State funding:

The Commission considers changes to current arrangements in particular program areas are warranted. Some of the more important of these are briefly summarised next.

Health and health related services

Education

Services to Aboriginals and Torres Strait Islanders

Family services

Housing

A 'best practice' Commonwealth: outcome focused, input efficient

Based on an examination of 'best practice' examples of overseas, interstate, private sector, and GBE operations, sensible use of new techniques and technology could both improve service quality and reduce its cost.

The existing Commonwealth Government employment framework, and in particular the complex and increasingly outdated Public Service Act, needs to be changed. For example:

Further improvements to service delivery can be made using specific techniques to identify better ways of doing things (examples where such techniques might be applied are presented in parentheses).

Fundamental structural and cultural change would provide the climate for substantial efficiency improvements. Provided that this type of change is embraced, the Commission considers that the following efficiency savings can be achieved:

As to the framework for providing performance information on Commonwealth programs, the Commission concludes that financial performance information needs to be supplemented with outcome focused performance information. To reinforce this process, Ministers should publish annual plans that explain their strategies to improve service quality and improve efficiency within their portfolios, and be required to report progress against those plans.

Budget pressures associated with demographic and social change

Australia's population is ageing. The ratio of those not in work to those working will rise over the next half century. The ratio of females working to males working is rising. Social support arrangements are shifting from private provision (families) to dependence on government funded services such as nursing homes and childcare supported by budget programs. On the basis of present arrangements:

The Commission concludes that the main expenditure areas generating pressure on the budget are health and aged care, family support payments (such as childcare) and age pension expenditures. Action will be necessary to moderate expectations about what support the Commonwealth Government can reasonably be expected to provide in future and to strengthen incentives for self help by those who can afford it.

Health and aged care

Continuation of existing trends in health costs and current funding arrangements would increase Commonwealth outlays from a current level of about 8½ per cent of GDP to around 12½ per cent of GDP over the next 50 years or so. Against today's GDP this would equate to a $19b cost increase. Ageing of the population, increased per capita use of health services and higher cost new technology are important contributing factors.

In addition to broader health system changes suggested earlier, the Commission recommends:

Family support payments, including childcare

Assistance for families with children through the social security system already exceeds $11b. Childcare assistance, in particular, has grown rapidly in recent years. The proliferation of new programs, targeted to low and middle income families, is the cause of increased outlays.

The Commission concludes that consideration should be given to:

Age pension expenditures: intergenerational fairness

The ageing of the population, together with current retirement income arrangements, have been a focus for concerns about fairness between generations.

The budget is dominated by current expenditures (as distinct from capital) which predominantly benefit current generations. Some current expenditure on education and health can be regarded as investment in a better quality community but no strong case exists for future generations to pay for it because the majority of the benefits accrue to the recipients of these services. Moreover, a publicly funded age pension is part of the social security system and will impose growing burdens on future generations as the population ages.

A comprehensive approach to retirement income provision and improved private saving

Improvements to current superannuation arrangements, in isolation, will fail to address fundamental problems with private saving incentives. The intended pro-saving effect can be offset by falls in other private savings or frustrated by dissipation of superannuation and other savings to preserve eligibility for the age pension and related benefits. This problem must be addressed in a comprehensive way if adverse private saving responses to the present retirement income system are to be reduced.

The Commission concludes that promotion of a stronger private saving culture requires:

Beyond these elements lies the question of what is an adequate pension, and how that affects other social security entitlements. This is covered next.

Benchmarks for judging benefit adequacy

The age pension at present has a pivotal role in relation to many social security benefits. Access to such benefits, and/or the value of such benefits, is set by the value of the age pension, and in some cases by eligibility for the age pension.

The Commission sees real dangers to Commonwealth finances in continuation of the status quo:

The Commission recommends the following:

The Commission also recommends consideration of the following options for change:

In addition, the Commission recommends consideration be given to:

Are infrastructure needs a source of pressure on the budget?

'Infrastructure' is a term used to cover capital assets such as transport and communications networks, power, water and sewerage networks (economic infrastructure); as well as schools, hospitals, prisons, and some recreational amenities (social infrastructure). There is a case to include some expenditures on education and health (investment in the quality of the community). The Commission concentrated on the first two of these categories.

Infrastructure is currently estimated at roughly one third of Australia's total stock of capital equipment. About 70 per cent of this is economic infrastructure.

The private sector has a growing share in the provision of infrastructure, now accounting for about 20 per cent of investment in economic infrastructure and about 17 per cent of investment in social infrastructure.

There has been a long term trend decline in aggregate public sector gross fixed capital expenditure (a proxy for public infrastructure investment) as a proportion of GDP.

The Commission is unable to conclude that these aggregate trends signify a growing overall infrastructure inadequacy, or otherwise, at the Commonwealth level, or elsewhere. The Commission has found evidence that past investment has been excessive in some areas (electricity, public transport, ports and sewerage facilities), and in other areas more investment would be desirable (arterial roads and highways). The Commission also found evidence of inefficient infrastructure operation and scope for better service pricing.

The Commission recommends that project specific rate of return analysis, covering both net private returns and net social benefits to the community, is the only way to judge the merits of specific proposals for new infrastructure investment, whether undertaken by the private or public sectors.

There is an increasing - and, in the Commission's view appropriate - tendency to use the private sector as the provider of infrastructure facilities, with governments acting in a regulatory or more limited funder/purchaser role.

At present, infrastructure investment needs do not appear to be a source of pressure, overall, on the Commonwealth budget.

An improved accounting framework for the Commonwealth sector

The Commission notes that the Parliament is seeking a financial reporting and accountability framework that better reveals revenues, expenses, assets, liabilities and contingent liabilities of the Commonwealth Government.

An accrual accounting framework forms the basis for the desired improvement in reporting:

Introducing full accrual accounting will entail some costs. The Commission considers that these will be relatively small when set against longer term benefits in terms of transparency, a wider understanding of government financial statements, a more businesslike approach to resource use in service delivery and associated cultural change in the Commonwealth Government.

The Commission recommends that:

A Commonwealth 'whole of government' financial report, 1994-95

The Commission was asked to report on the finances of the Commonwealth including identification of assets, liabilities and contingent liabilities. In particular, it was asked to examine unfunded superannuation liabilities and other employee benefits, Commonwealth guarantees, foreign exchange exposures and insurance and other financial arrangements such as leases.

While the Commonwealth does not at present have a full accrual framework in place, its entities do report to the Parliament on an accrual basis. It is therefore possible to compile a set of whole of government statements on an accrual basis.

This has been done on a trial basis for 1994-95, the latest complete financial year, by the Department of Finance and the Australian National Audit Office. The resulting statements have been made available to the Commission. The statements were consolidated from the audited financial reports of Commonwealth entities, but were not themselves audited.

In relation to this information, the Commission points out that:

The Commission recommends that:

Financial summary - Commonwealth whole of government, financial reports 1994-95

[Table Missing]

The above table summarises the financial position of the Commonwealth Government as shown in the statements (figures may not add to the relevant totals due to rounding).

Proposals for the Charter of Budget Honesty

The Commission recommends that:

© Commonwealth of Australia