Friday, October 10, 2008

States need to lift their game

Australian states and territories appear to have been steadily losing friends for a long period of time.

The group of those not enamoured with the states includes former and present politicians from across the ideological spectrum.

Federal Defence Minister Joel Fitzgibbon called for the abolition of the states in the inaugural Edmund Barton lecture in July.

In his maiden speech to the Senate -- the states' house in the federal parliament -- John "Wacka" Williams said:  "I believe that we should have only two tiers of government in Australia, a federal government and regional governments."  Federal Finance Minister Lindsay Tanner has also previously favoured the abolition of state and territory governments.

To the cynics among us, these kinds of sentiments expressed by commonwealth politicians are not surprising.  After all, it is often remarked, "Show me a federal pollie, and I'll show you a centralist."  However, even former state political identities have made similar calls.  Former NSW treasurer Michael Costa stated his preference for state abolition, and former premier Bob Carr said in August that the states are a "dying institution" that would require only part-time parliamentarians to function.

Apart from the (former) political elite, surveys suggest that the general public is becoming intensely dissatisfied with the states.

A Newspoll survey conducted for Griffith University in July showed that about 42 per cent of people surveyed regarded the performance of states as poor or very poor.  It also showed that a sizeable minority of those surveyed (about 31 per cent) wanted to see the states abolished.

How has it come to this?  The increasing involvement of the commonwealth government in the constitutional responsibilities of the states is one culprit.  Successive governments in Canberra have come to dictate many policy and administrative settings of the states in areas such as health, education, transport and so on.  This creeping centralism may leave the general public shrugging their shoulders and asking themselves, "Why have the states when the commonwealth is doing part of the job already?"

Although commonwealth intervention in state affairs is a significant problem for our federation, it is important not to overlook the states.  For a start, lower levels of government retain financial muscle.  In 2006-07, the states (and their local governments) spent a staggering $151 billion, equivalent to about 14 per cent of gross domestic product.

The states also retain important decision-making powers and controls over services that are critical to Australia's economic growth and productivity.  Therefore when survey respondents claim that states' performance is poor or very poor, it is important to take notice.

A significant portion of the blame for the reduced esteem for state governments must lie with the states.  The states and territories have benefited from substantial increases in revenues over the past 10 years, including from state taxes and the GST.  With this tidal wave of gold flowing into their coffers, the states have chosen to increase their expenditure at a rapid rate.

Indeed, since the late 1990s, many newly appointed state Labor governments have extolled the virtues of government spending, chiefly as a tool to overcome alleged expenditure neglect by former state Coalition administrations.

An analysis of state financial data illustrates, however, that much of the additional spending was accounted for by rising expenditure on the labour inputs used to deliver government services.  Using Australian Bureau of Statistics labour market data, and calibrating for the timing of first state Labor election wins in the present electoral cycle, the total number of bureaucrats employed increased from about 1.1 million to about 1.25 million:  an increase of about 176,000, or about 16 per cent.

For the general government sector, employee expenses increased by about $23 billion whereas total expenses increased by about $52 billion.  In other words, about 44 per cent of total general government spending by the states was absorbed by bureaucratic wage claims.

Nationally, expenses by state governments on bureaucratic labour costs alone stood at 6 per cent of GDP.  This spending is broadly equivalent to the share of the retail sector in the national economy, and bureaucrats stand to gain more pay if recent wage claims by public sector unions are approved.

The growth in bureaucrat numbers and public sector wage costs does not appear to have led to sustained improvements in service delivery that would justify the spending increases.  On any significant indicator of performance -- such as school student benchmark testing results, waiting times for elective surgery or emergency treatments in public hospitals, complaints about policing services, or peak-hour travel times on city roads -- it is clear that the service outcomes are mixed at best.  Indeed, there has been deterioration in performance against some of these indicators in some states.

The divorce between state spending decisions and outcomes clearly shows that the formula adopted by Labor governments -- to shift receipts out the door to the bureaucratic classes as fast as possible -- has failed.  Therefore, it is unsurprising that state governments have fallen out of favour with the political elite and general public alike.

The key to rebuilding support for the role of the states in our federal system rests with engaging in genuine reform to improve results.  For example, funding entitlements for school students should be made more portable across schooling systems, and individual government schools should have greater autonomy to manage their affairs.  Contracting out public hospital patient treatment to private hospitals can help alleviate waiting lists, and more information on hospital performance can help patients make better care decisions.  The private sector could also play a larger role in building public infrastructure assets ranging from road networks to public housing.

Many of these reforms will require a sea change on state policies to leverage greater private sector involvement in service delivery.  That said, such measures promise to boost efficiency and deliver services more quickly as a consequence of greater competition and the provision of tailored services.  This also allows the states to overcome any revenue raising limitations that may otherwise hamper service delivery.

If states are prepared to move away from the tired old bureaucratic model and inject market competition into services, as well as lowering taxes and regulatory burdens, perhaps some greater public esteem for the states will ensue.  It may even turn around the growing voter sentiment against state Labor governments, as highlighted in this week's Newspoll.  The beauty of reform is that it's never too late to start.


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