Efficiency dividends 'encouraged' agency budget over-bids

By David Donaldson

November 13, 2015

Australian governance systems are out of date when it comes to the challenge of reining in the budget deficit, allowing agencies to dodge budget cuts, says public sector academic John Wanna.

The system where agencies bid for funding undermines efforts to reduce spending, he argues.

John Wan
John Wanna

“We’ve got an efficiency dividend, for example, which is meant to make agencies more productive. All agencies get around this by padding their next bid, as this gets them more money to offset what they lost in the efficiency dividend. Only if you don’t make bids do you suffer the efficiency dividend cuts, so it encourages people to over-bid.”

Central agencies are aware of this and are thinking about changing the rules, he says.

“We’ve still got a lot of 19th century thinking, 19th century institutions, dysfunctional systems which give us less optimal structures,” says Wanna, who is Australia and New Zealand School of Government national director of research in public administration and holds the Sir John Bunting Chair of Public Administration at the Australian National University.

The two main culprits are consolidated revenue and the federal structure, he thinks. Consolidated revenue, where most money is put into a central pool from which most expenditure is drawn, “is a huge structural problem”. Wanna believes greater hypothecation — where taxes are taken for a specific purpose and put into a fund for that purpose, a method used in much of continental Europe — could be a way of creating a stronger link between tax collection and spending.

“A few years ago, state and federal treasuries would burn you on a pyre of fire as a witch if you mentioned hypothecation. They hate it, it restricts their flexibility. But actually as a society it’s quite a good policy,” he told last week’s Economic and Social Outlook conference in Melbourne.

“It means that if say you want to give more pharmaceutical benefits, more subsidies, you just increase the taxpayer charge rate, and that goes into the fund. If you want to decrease the charge rate, decrease it, but then you also decrease the benefit. But you’re keeping more and more of those funds off consolidated revenue and you’re managing them in an actuarial sense,” he explains.

Wanna thinks the blurred lines of accountability caused by the web of Commonwealth and state responsibilities around service delivery “does encourage the federal government behave irresponsibly — dangling bits of money out, pushing things out into areas where they want to”.

He says he’s “moderately optimistic” about different governments working together, but remains “very pessimistic” that the Reform of the Federation White Paper will fix enduring problems of Commonwealth-state cooperation.

The expansion of non-discretionary spending and uncapped social programs in recent decades has placed strain on budgets, he argues. “That gives you really little wiggle room when you’re trying to make your budgets more manageable.”

Problems of budget management are exacerbated by the small number of agencies monitoring spending compared to the abundance of spending departments.

“We have nominally three guardians — Finance, Treasury, PM&C — and the rest — thousands of agencies — are making claims against the budget. It’s a very weak ratio of controllers of the public purse to plunderers of the public purse,” he says.

“Also the guardians are often split on their strategies. Prime Minister bounces around a lot, including ones who talk tough. Sometimes Treasury’s more interested in the macroeconomic effects of the budget rather than whether we’re overspending in terms of revenues. We have problems there that really haven’t been addressed.”

Ready-made alternatives

The present system relies on the will power of politicians to spend within limits — an approach that is a “very slender thread”, he argues.

There are a few ways Australian governments could keep costs down. Other than hypothecation, expenditure caps are one option. Sweden and South Korea, which decide caps a few years out — with the possibility of raising them down the track, though this is “very politically difficult” — are going into surplus, unlike most of the rest of the OECD.

We should consider the “actuarial” model being introduced in New Zealand, which has been making an effort to harness short term policy to realise long term savings, for example by working out how to intervene in the lives of children in at-risk circumstances to reduce the costs to social services in ten years’ time.

And although he admits Singapore has a very different political system to Australia, its budgetary model is something to think about. The city state divides its budget into seven areas, assigning funding levels by formula and allowing spending autonomy within that envelope. There’s no argument over who gets what this way, he says.

“The trick there is you can only grow your resources by growing the economy, so there’s a huge focus in Singapore agencies to collaborate together in what they’re spending to raise economic growth because that’s the only way they get more budget responsibilities. It’s a completely different way of seeing use of public funds than we [have],” he explains.

Wanna agrees that Australia’s avoidance of the worst effects of the global financial crisis through good management has meant that “we have closed our eyes to some of the more structural change”.

“We very quickly went onto business as usual and didn’t make some of the changes we probably needed to make. I think at the moment we’re at a kind of hiatus or cross roads and we’re waiting for someone to put some agendas on the table.”

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