A New Vision for
"Ring out the old, ring in the new.
Ring out a slowly dying cause"
from Tennyson's, "In Memoriam"
Address by Des Moore
Commerce Queensland Function
Sofitel Hotel, Brisbane
Thursday 4 May 2006
On 10 February something almost unprecedented happened in Canberra. At the Council of Australian Governments all the State Labor Premiers (and their Territory colleagues) agreed with the Liberal Prime Minister on a national economic reform agenda designed to improve health and education outcomes, to increase competition in the energy, transport and ports markets and to reduce the regulatory burden on businesses. So reform is supposedly in the air at all levels of government and the emphasis is on increasing competition. It almost leads one to think that Tennyson will at last find vindication for his poem, In Memoriam, in which he pronounced it is time to "Ring out the old, Ring in the new . Ring out a slowly dying cause".
What are the implications of this for individual state governments and particularly the Queensland Government, which is the subject of my report on the role of government in that state? Does the Queensland Government need to wait for all governments to agree on Intergovermental Action Plans (IAPs) in each of the various areas?
To the contrary, my report indicates there is a great deal the Queensland Government can do on its own by applying the increased competition objective to the services it provides.
My thesis is that it is in the government's own interests to maximise the role of the private sector in the provision of services that have traditionally been regarded as the responsibility of governments. The dividing line between the private and government sectors has ceased to be clearly defined because, through contracting type arrangements, governments (and others) are now increasingly realising that the private sector has the capacity to provide a large proportion of what have hitherto been regarded as public goods.
This is true even in the case of security. The US army, for example, has 52,000 contractors in Iraq maintaining and rebuilding defence equipment and in Australia (and other countries) police security is supplemented by substantial private protective services while some gaols are also operated by the private sector. We see a similar situation in health, education, transport and - well the list goes on.
Why is it likely to be in the government's own interests when an increase in the private sector's role will mean a smaller government sector? The basic answer is that the provision of services through a competitive framework will benefit the consumers of those services - that is, most Queenslanders. Whether assessed in terms of economic prosperity or social well-being, such a framework provides a more efficient and higher quality way of delivering essential services wherever that is practicable.
This is not a view confined to one side of politics. Even leaving aside the bipartisan agreement at COAG, I note, for example, that Shadow Federal Finance Minister, Lindsay Tanner, told the Centre for Independent Studies in March that "public ownership is less important than it once was .regulation and competition can now contribute a great deal more to social outcomes than they could fifty years ago" - even fifteen years ago the then Federal Labor Finance Minister would never have even thought of addressing the CIS. And as young Queensland Federal Labor MP, Craig Emerson, recently pointed out, "If we are to achieve excellence in education, schools and universities will need increasingly to specialise in a more competitive environment competition can no longer be a dirty word" (AFR 10 April).
Moreover, because an increased private sector role offers potential for a lower level of taxation as well as better services it is difficult to see that any government implementing a pro-private sector role would fail electorally. In short, a properly implemented reform by the state government should be both economically and politically successful.
A deliberative policy of increasing the competitive environment for service provision can be implemented in two ways - first, by acting directly to improve the performance of those services retained within government and, second, by taking steps to encourage a major increase in the proportion of such services provided by enterprises operating outside the government sector.
The direct approach can be implemented by giving effect to the 1996 Queensland Commission of Audit purchaser/provider recommendation that the government "strongly separate its role as a demanding purchaser of services.from the role of service provider; that it fund providers only against service outputs or results; and that it ensure that providers face competitive pressures to improve performance continuously". In short, while the government would retain full responsibility for funding, the actual delivery of major services by the state would be opened to competition from the private sector. Drawing on developments under the Blair Government, one prominent economic analyst in the United Kingdom has suggested that, in the not too distant future, governments may cease to be direct employers of teachers or doctors.
In Queensland, however, the purchaser/provider approach could be implemented over a period and proceed initially on a step by step basis. For example, hospitals policy could start by giving public hospitals greater autonomy and the right (and financial incentive) to contract out the provision of discrete services such as pathology and certain types of surgery. The state I come from, Victoria, has already built a major new public hospital under a PPP arrangement and the government is reportedly now moving to implement a similar arrangement for the re-development of another of our major public hospitals.
In similar vein, the NSW government has had a private sector firm finance, design and construct nine schools and, according to a NSW Treasury analysis, these schools were built for much less and two years earlier than would have been possible under a traditional public sector contract. The contractor has also effectively taken over the administration of the schools for 30 years. Schools policy would also benefit from the provision of increased autonomy to headmasters over staffing decisions as this would increase the capacity to effectively manage the work force and reduce restrictive union practices. Of course, all contracting out would need to specify clear performance standards.
The second - or what might be called the indirect - approach would be to further encourage the development of private sector services that compete with government services or that take over the public sector role where that appears likely to improve the efficiency and quality of services. In Queensland the government has been giving some - albeit only limited - encouragement to the development of competing private sector services. However, the driving force behind the considerable expansion of such services since 1997-98, with associated savings to the Queensland budget, has clearly been the increasing acceptance by the community that the private sector is offering services of a higher quality and the wider choice that modern society wants. In effect, users of these services are increasingly voting with their feet even though they have to pay fees as well as taxes.
For example, since 1997-98 the proportion of students attending fee-charging non-government schools has increased from 28 to over 30 per cent and the almost 200,000 students attending such schools in 2005 effectively saved the Queensland Government and hence the taxpayer over $1 billion net in that year. The increase in the proportion of patients treated at fee-charging private hospitals has been little short of dramatic, up from 36 to 47 per cent in 2003-04. At that level it was the highest for any state and effectively saved the Queensland Government nearly $1.9 billion per annum net.
It was surprising that neither the Forster nor the Davies inquiries gave recognition to the main reason for Queensland's public hospitals having a lower rate of per head expenditure than in other states. That reason was, of course, that Queensland's private hospitals had the highest usage rate amongst the states. Also puzzling was the failure of Forster and Davies to recognize that private hospitals now have the capacity and potential to increasingly take over the role of public hospitals.
Where services are provided by Queensland public trading corporations, the private sector has had less scope to expand. The Queensland Government did decide it had no direct role to play in various financial sector activities, leading to its sale of organizations such as Suncorp, the Bank of Queensland and the TAB. It has also used private participants in some electricity generation projects, although the principal investor (Shell) in such projects sold its interests, reportedly because of uncertainty about the government's own investment policy in regard to power generation. Unfortunately, to date the 1996 Audit Commission report has largely been ignored even though it correctly observed that "the Government's involvement
in business is plainly too extensive and in many cases performance is mediocre relative to benchmarks. Some of these assets should be sold and others exposed to more competition".
As I have indicated, the main reason for developing a competitive framework that would create a larger private sector role is that it would improve the quality and efficiency of services. However, an additional reason for such an initiative is the seriously deteriorating budgetary outlook faced by the state as revealed in my report. The harsh reality is that the Queensland Government is moving into a budgetary situation in which its capacity to finance expenditure will be much reduced compared with recent years.
For one thing, budget operating surpluses will cease to be a source of funds for capital expenditure. Various recent decisions to increase budgetary expenditure, particularly in health, have almost certainly eliminated the much reduced operating surpluses of $140-250 million estimated in the October 2005 mini-budget for the three years 2006-07 to 2008-09 Ð and possibly even the estimate of $718 million for the current year too. Even though the state's strong balance sheet would allow considerable borrowings to finance capital expenditure in the general government sector without having adverse effects on the AAA credit rating, it is fiscally and morally desirable that most of such capital expenditures be financed from budget operating surpluses.
For the period immediately ahead, however, the most serious problem facing the Queensland Government relates to the extent of its capacity to finance recurrent expenditures. The revenue projections in the state budget out to 2008-09 suggest that total revenue will increase in nominal terms by only 4 per cent a year. This is much slower than the projected 7 per cent per annum increase in GSP and, importantly, it is also much slower than the 7 per cent per annum growth in revenue from 1997-98 to 2005-06. In other words, the government faces the prospect of having to reduce by 3 per cent per annum the growth in recurrent spending on the services it provides.
The main reason for this development is the much slower projected growth in revenue from the GST. Thus, whereas Queensland's GST receipts increased at 10.3 per cent a year from 2000-01 to 2005-06, they are now projected to increase at only about 4 per cent a year. This slower projected growth rate reflects an expected slower growth in national consumption expenditure and an expected reduction in Queensland's share of GST revenues. In practical terms this means that Queensland's projected total budget revenue of $30.3 billion in 2008-09 is about $2.7 billion less than if the previous GST growth rate had continued - and recurrent expenditure is lower to the same extent. In short, the GST "bonanza" appears to be over and, unless taxes are to be increased, there will be a shortfall in the level of services that can only be made up from increases by the private sector.
The case for an increased role for the private sector is also enhanced by two aspects of the Queensland economy that are not sufficiently recognized.
First, although the contribution by the Queensland private sector to the state's total final demand has become progressively larger since the early 1990s, other states have also experienced an increase in the private sector's role. In fact, in 2004-05 the Queensland private sector's contribution to state final demand was smaller than in the three other largest states. Due mainly to Victoria's more extensive privatizations, that state's private sector currently makes the largest contribution to growth. In short, there is already a degree of competition between the states on the extent of the private sector's role and Queensland is starting a little behind scratch.
Second, despite Queensland's much vaunted faster rate of economic growth than any other state in recent years, it is starting well behind scratch in the per head growth stakes. In 2004-05 it was running fourth in those stakes with a per head income 10 per cent lower than the Australian average and about 12 per cent lower than in NSW and Victoria. That was certainly an improvement on the situation in 1997-98 when it was fifth in the per head stakes and checked in at 14 per cent lower than the average.
However, in the seven years of the present government Queensland has only managed (just) to pass South Australia on the home turn and it is still a good distance behind the heavy weights as the horses move down the straight. One could be excused for thinking that a new jockey may be needed if it is to catch the others before the winning post!
But before we get to the winning post I should refer to my report's important Appendix on "Achieving Sustained Economic Growth" by former senior Queensland Treasury officer, Michael Cunningham. Michael points out that Queensland's productivity position relative to other states is even worse than its relative per head income position. His analysis also indicates that one unfortunate outcome of this situation is the attempt in 2003 by the Queensland Treasury, doubtless seeing itself as an obedient component of the public service, to identify state-based policies that might directly promote productivity growth. This project on the so-called drivers of economic growth is featured on a Government web site and has evidently provided a basis for interventionist policies designed to develop innovation-based initiatives in Queensland to lift productivity.
But, as Michael points out, the Government would be better advised if it recognised the need for more general policies that create an economic environment that is receptive, dare I say welcoming, to the private sector. A major program of reduced regulation of businesses would be both helpful and have the potential to lead the states. It would certainly include a revamp of the "Review of Hot Spots for Regulatory Reform", which seems to have made little progress in the Department of State Development, Trade and Innovation (one can only wonder at the decision to include "innovation" in the name of a department of state!). Even an obedient Treasury would seem to be a better home for such responsibilities.
In a country where people and resources are relatively free to move between states most economists would have expected Queensland to experience a faster rate of convergence in per head incomes and productivity. Although there is no proven direct relationship between changes in economic growth and the size of the public sector, it seems almost indisputable that Queensland would have performed better if it had done more to encourage the sector that is the driving force in growth and employment. By "encourage" I do not mean, of course, the pursuit of policies by the state that involve attempts to pick winners in the private sector, such as the magnesium smelter project that is reported to have been costly for many small investors. One wonders whether the members of the Queensland Government actually realize that, while business investment provides no less than 75 per cent of all investment in the state other than in dwellings, the important issue is not the quantity but the quality of such investment.
The contrast between the experiences of NSW and Victoria over the past seven years may have some relevance to Queensland. While those states' private sectors did not increase their relative contributions to state final demand over this particular period, Victoria started with the advantage of already having a larger contribution from that sector. As my report shows, it has also been more receptive than NSW to private sector participation in government services. Against this background, it is not altogether surprising that Victoria's per head income increased relative to the Australian average while NSW's fell. From being well out in front of Victoria, NSW is now struggling to keep its head in front of that state.
If the Queensland Government were now to take the lead amongst Australian states by announcing that the state will positively and comprehensively seek and encourage private sector involvement both across the whole range of government services and in the economy more generally, such a policy would have considerable potential for improving the economic and social positions of the wider Queensland community and closing the per head income gap that remains. My report outlines various specific proposals which I will come to in a moment.
But I want first to highlight the basis on which I am proposing a program to reduce the level of State taxation by between a fifth and a seventh, that is, by $1,000 -1,500 million per annum. Such a proposal is advanced not because amongst the states Queensland has a big spending government: it does not. But in a budget of $27 billion it would undoubtedly be able to find savings of $1 billion, that is, about 4 per cent of total expenditure. The question is - can the government adjust its priorities?
Looking at spending in isolation, the Government may feel unable politically to handle the outcry from those who would lose from reductions in a particular item or items. But what if the Government were to decide to implement reductions in spending with the specific purpose of financing major tax cuts as part of a new and innovative approach to governing the state? In short, if the government has the capacity and inclination to effect a major change in its priorities that would benefit the Queensland community, it should be able to handle the reduced spending complainers with minimal electoral harm.
That is the basis of my proposal for a major program of lower taxes. It would be presented as part of a comprehensive change in priorities designed to make Queensland renowned for being the most attractive to private investors. Instead of having taxes only about 14 per cent below the average for the states, Queensland would have them about 30 per cent below. Think how attractive that would make Queensland to investors, not to mention families and individuals.
The reductions in taxes would be partly financed by reducing concessional expenditures such as subsidies for tariffs and petroleum and some allocations included under the rubric of "general public services". These proposed reductions in expenditures, it should be noted, would involve no more than bringing Queensland's spending in the areas concerned down to the same as the average for the states - subsidies for electricity and petroleum would remain, for example.
Further expenditure savings could be made by reducing what is an excessive number of departments and statutory authorities (particularly the latter) through amalgamations of those with similar functions, and by eliminating functions such as the government printer and centralised public works maintenance that could be more efficiently performed by the private sector. There is also a case for limiting the growth in public service employees to, say, 1 per cent per annum after their recent growth of over 3 per cent per annum in circumstances where the population has been growing at only 2 per cent per annum .
Over time significant savings in expenditure would also emerge if the policy of an enhanced private sector role in providing intra-government services was seriously pursued. As mentioned, that would include the implementation of the purchaser/provider model recommended by the 1996 Audit Commission involving the contracting out of an increasing proportion of existing government services. The most important initiative, however, would be the pursuit of policies to actively encourage both non-government schools and private hospitals and to replace services provided by most public corporations with services provided by private sector enterprises. Possible such policies are outlined in my report but I mention four main themes here.
First, an announced government policy intent of a comprehensive and enhanced private sector role in Queensland, both in relation to so-called government services and more generally.
Second, an announced intention that most of the $22 billion of public corporation assets will be sold. Why has the Government gone only half way in the privatization of electricity? The retention of a State electricity generation system that earns below par returns on assets seems inconsistent with the February COAG decision to "improve price signals for energy consumers and investors" and the various "justifications" offered by the Premier and Treasurer merely serve to confirm that Queensland has some way to go to recognize the benefits to the wider community of having a competitive private enterprise sector.
It should also be noted that, after allowing for the loss to the budget of dividends and tax equivalent payments, privatisations would probably produce a small net annual saving to the budget. If an announcement of a full privatization program was decided, it should also indicate that the private sector's involvement in infrastructure projects of a public sector type, such as hospitals, schools and roads, would be actively sought through public-private partnerships and/or contracting out.
Third, an announced intention of active encouragement of non-government schools and private hospitals and an indication of specific policies designed to achieve that end. These would include an indication that the government expects its own institutions to absorb further reductions in the proportion of "clients" (ie students and patients) from the Queensland community; an offer of low interest loans for capital expenditure (and in the case of non-government schools the provision of a faster increase in state grants); an indication that ready accreditation would be given to applications to start new institutions or expand existing ones regardless of whether they would compete with existing government institutions; and a change in regulations designed to improve the position of private institutions, such as requiring only minimal curricula for non-government schools and establishing a normal waiting time of 12 months for private (insured) patients wanting treatment in public hospitals even though they could readily be treated in private hospitals.
Fourth, I am proposing an inquiry into establishing an upper house as a house of review. At first glance this may seem a rather backward step unlikely to improve the image of Queensland as a promoter of the private sector. However, at a recent academic conference on the issue, several papers pointed to the merits of having additional accountability testing of the government and the case was made that the Queensland Legislative Assembly does not do an adequate job. An upper house today would, of course, be elected not appointed (as was the case with the one that was abolished in the early 1920s) and, if the total number of MPs is not increased, there need be no significant additional cost.
The challenge posed by this report is to all State political parties to recognise that State government action along the lines outlined will be beneficial to residents (and visitors) - and to the government itself. By beneficial I mean not simply an improved economic situation but a society that will be more satisfied with life because individuals will make more decisions themselves and the role of governments will be limited to no more than what cannot be performed by individuals or private enterprises.