Friday, March 22, 2013

Plenty of fat to trim if leaders get real

Over the past 60 years, Australia, like most Western countries, has seen a very rapid growth in the size of government.  Whereas 60 years ago federal and state government accounted for about 25 per cent of the national cake, today it is 35 per cent.

In an attempt to emulate the cost savings that market forces impose on private-sector activities, governments place ''efficiency dividend'' requirements on the public sector.  Traditionally a 1.5 per cent reduction in spending each year, this was raised to 4 per cent for the current year and was expected to result in 4200 jobs being shed and a saving of $500 million.

The problem is that activist governments dream up new functions, taskforces and commissions faster than they downsize existing departmental programs.

Finance Minister Penny Wong makes tough-sounding noises about belt tightening but nothing ever seems to come of it.  And with vastly expanded education spending foreshadowed following the Gonski report and the National Disability Insurance Scheme already ''committed'', the outlook for expenditure looks to have been raised another notch or two.

The real issue with government spending is that the vast majority of it redistributes income from those the government considers are able to pay to those who are most worthy of support.  But redistribution raises costs and reduces returns, thereby dampening producers' incentives to supply.  At the same time it encourages more people to place themselves in the recipient category.

The net effect is lower growth and, as observed in those European countries with even more profligate government spending than Australia, this can deteriorate into economic decline.  Unlike the private sector, the public sector will rarely find that a program's worth is so reduced from its original rationale that it is closed down.

Accordingly, I am proposing a root-and-branch assessment of the need for existing functions.  This targets the many functions undertaken by the federal public service that offer little and sometimes negative value.

Except where duplication with state spending is concerned and where funds are spent on social research, the savings identified exclude the major health, education and welfare programs which account for some 60 per cent of government spending.

Such expenditures require political judgments and evaluations of one against another.  The best approach would be to specify an aggregate fixed proportion of gross domestic product to the funding of these worthy expenditures.

Some $22.5 billion in program savings are identified below in addition to which are $2.4 billion savings in staffing costs.  These entail 23,500 positions.  Coincidentally, shedding that many people would return the public sector to its size, relative to the aggregate workforce, in 2001.

Some of the major items include:

  • More than $5 billion in foreign aid in the form of development assistance; this has never been instrumental in helping poor countries achieve economic relief and has a negative effect by focusing their administrative resources on obtaining assistance rather than transforming their economies into free-market productive entities.
  • $9 billion in Commonwealth duplication in housing, environmental and community amenities:  these are state functions and the Commonwealth should leave them to that level of government.
  • Privatise the ABC and SBS, saving $1.2 billion; other media outlets raise their own revenues and so should the national broadcasters.
  • $2 billion in agriculture forestry and fishing; much of this deals with environmental barriers and industry-specific research activities, none of which have ever produced benefits significant enough to warrant their continuing funding.
  • $1.6 billion in general research grants; while much of the basic research of the CSIRO serves genuine collective needs, increasingly research in CSIRO, the Met Office and especially in the Australian Research Council has become politically oriented around climate change and social agitation.

Many functions should be cut entirely — the Climate Change Department being an obvious candidate.

In addition, most of Sustainability and Water, parts of Education, Health and Ageing, and Transport departments simply duplicate state functions and in some cases erect additional barriers to investment activity.

An incorruptible and politically neutral public service is a vital element in creating the conditions under which national prosperity can flourish.

Unfortunately many activities have massively outgrown any original rationale they might have had while others have become politicised or focused on their own empire building.

Placing downward pressure on expenditures remains a priority and yesterday's ALP leadership vote changes nothing.

No comments: