Gary Banks: reshaping government, the way forward

By Gary Banks

Tuesday August 5, 2014

The global financial crisis, its origins in deficient market regulation and housing subsidisation, and its aftermath of fiscal deficits and sluggish growth, have led many governments not only to consolidate their finances, but also to consider whether their own roles need to be pared back or refocussed.

Australia’s new national government has signalled an end to a perceived “age of entitlement”, with recent budgetary measures not just lowering the trajectory of spending on social programs and industry support, but also altering its nature and coverage in an attempt to motivate greater self-reliance and work effort. Similar developments are occurring in New Zealand, where the public sector’s share of GDP has exceeded that of Australia.

The issues around the reshaping of government’s role and how that role is best discharged are not uncontested, with opposition parties in both countries taking a contrary stance in key areas. How this plays out politically could be expected to have significant implications not only for future living standards in the two countries, but also for public administrations and public servants.

The expansion in government spending and regulation over past decades, which is also evident in other OECD countries, did not come out of thin air. Every regulation or spending measure responded to a call for government to “do something” to remedy a perceived problem or need within our society and economy. Many such demands are entirely legitimate and governments have responded to them appropriately, in ways that yield net benefits to the community. But some do not pass these tests. And of those that do, some may exceed the capacity of society to “pay”. In the end, democracy is about making choices and trade-offs. And as economists like to put it, there are no “free lunches”.

(My thanks to colleagues at ANZSOG for helpful suggestions and feedback on earlier drafts. I have resisted inserting source material throughout the text, as I wanted to make the paper as readable as possible for a conference audience. It will nevertheless be apparent that in various places I have drawn on works by the Productivity Commission, which can be easily found, as well as ANZSOG publications. However, if any readers wished to follow up on specific sources, I would be happy to direct them.)

The goal of ‘prosperity’

While the means by which governments are responding to current pressures may be a matter for political dispute, the broad policy goals — a more prosperous, fair and harmonious society — are shared. Moreover, despite assertions to the contrary, there need be no trade-offs among these desirable ends.

“Prosperity”, as applied to a society, is self-evidently an encompassing concept. It requires consideration of how income and wealth are distributed, as well as their levels. No-one would describe countries in which a large proportion of the population live in poverty — such as China or India — as “prosperous”, regardless of their economic size in aggregate.

Distribution clearly matters. And redistribution has an obvious role to play in this, one which OECD governments have assiduously pursued through their tax and welfare systems, and by other means. But to reprise a slogan from the reform discourse of an earlier era, a government cannot redistribute what its economy does not produce. Prosperous societies need productive economies. Both the wealth creation and income-distribution sides must be attended to by any government seeking to “grow national prosperity”.

The existence of rising structural deficits and mounting public debts can be interpreted, therefore, as a manifestation of an imbalance between these joint requirements. Many commentators have blamed this on the undue expectations of the public, which governments struggle to meet financially, and there is no doubt that demands have been rising. But historical experience tells us that the perceptions and expectations of the “public” are not formed in isolation of governments’ own actions, and the narratives by which it chooses to frame these. Governments lead as well as follow their electorates, even if not always intentionally.

The challenges remain great

By international standards, Australia and New Zealand have been successful countries in social as well as economic terms. But neither country has cause for complacency. Although both have relatively high income levels on average, these hide a significant and widening dispersion of incomes, as well as pockets of entrenched disadvantage, including within their indigenous populations. While unemployment rates remain relatively low overall, youth unemployment has stayed persistently high and intergenerational welfare dependence looms large in some communities.

Both countries also face environmental challenges that will require costly interventions. And both have ageing demographics that are elevating demands for government payments and services, while simultaneously reducing the proportion of the population in the workforce generating the tax revenue to pay for them. And, while both countries have benefitted from the economic uplift in China and other parts of Asia, exports remain vulnerable to the health of those economies and to the ongoing fragilities in financial systems globally.

The challenge facing governments in raising prosperity, therefore, remains a dual one of: (a) fostering sustained economic growth; and (b) delivering benefits from the growth dividend that can address social needs — but in ways that are legitimate, effective and sustainable, and that do not inhibit the growth process itself.

This is not a new imperative. However, at the outset of the 21st century, and regardless of who is in power, it brings some novel challenges and seems destined to take a course that diverges significantly from that to which we became accustomed in the 20th century.

Ultimately, economic growth and the prosperity that flows from it depend on how well we deploy our available resources — our people and capital. Governments influence this in two ways: through the scale, composition and efficiency of their own operations, which account for around one-third of the economy; and through regulatory actions and spending programs that affect the many businesses and organisations that make up the rest. These influences are interrelated, since governments compete with other sectors for scarce resources.

Whither the ‘welfare state’?

A key issue is the future of the welfare state itself. Commonly devised to meet the simpler needs of a different society in more parsimonious times, welfare arrangements have progressively expanded and multiplied to the point where, in Australia, a fifth of the population receives some form of income support and an increasing number of households derive the whole of their incomes from government transfers. Tax “expenditures” — targeted concessions and exemptions — have also proliferated, extending well beyond people on low incomes. Apart from the adverse incentive effects, the taxation “churn” associated with this extensive transfer system in itself imposes a substantial cost on the economy. (A finding widely accepted by economists, though rarely acknowledged by governments, is that each additional dollar of tax revenue raised reduces national output by at least 20 cents.)

Has the welfare system become more “cargo net” than “safety net”, as Australia’s Treasurer has depicted it? Should income support be redirected to those in most need? And to what extent should any such payments have ‘strings attached’, to ensure that they do not perversely entrench the qualifying conditions of those who receive them? Further, might some of the money currently devoted to welfare be better utilised in other program areas, like education or health? Such questions have been increasingly asked in New Zealand and Australia as fiscal circumstances have become less accommodating. And they are being increasingly answered in the affirmative, as recent policy changes in both countries attest.

The issues that follow from this assessment become rather harder, however, going to how boundaries of eligibility should be redrawn, and programs amended or rationalised in number, so as to meet priority social objectives more cost-effectively, while reducing incentives to become dependent on or game “the system”. (For example, despite attempts to tighten eligibility, there are not far off a million Australians of working age on the Disability Support Pension, many of whom migrated from unemployment benefits.)

This represents a complex analytical and informational task for governments, requiring strong policy skills and implementation systems within administrations, and whole-of-government approaches. For example, in Australia it is currently difficult even to track the range of welfare payments received by individual households. Informed decision-making in this area also requires effective engagement with those likely to be affected, if impacts are to be properly understood, programs rationalised well and transitional arrangements devised.

A key question for ANZSOG’s conference is whether these conditions are being adequately met. And if not, what actions, or further actions, are needed to ensure they are.

Pressure points of our ageing population

As is generally known, the proportion of the population aged over 65 will double within the next few decades. Less known is the fact that the proportion of the “oldest”, those over 85, will rise by at least five times. For Australia, this coincides with projected rapid growth in population from immigration, which means that the absolute increases loom even larger. This has obvious implications for both aged care and health services, as well as for public pensions, with governments facing additional budgetary pressures equivalent to some 6% of GDP. Governments have been acting in each of those areas, but there is more to do, and resistance to change is palpable.

Caring for the aged

In both Australia and New Zealand, changes have been made to aged care systems that seek to enhance quality and choice while addressing deficiencies in funding structures that have historically bedevilled both.

Recent changes to Australia’s system, following a major review by the Productivity Commission, include improved information, increased flexibility in provision of services and greater user contributions to costs where appropriate. However recommendations to free up the supply side, enhance competition and directly empower consumers financially have not been taken up. Questions raised included the extent to which users could make decisions in their own interests and whether the market was sufficiently mature.

Clearly, the need to balance individual responsibility, fairness and budgetary sustainability while enhancing service provision is challenging. In part, the way forward should become clearer as recent reforms play out. How are these going? What have been the implementation issues for those administering and at the “front lines” of the aged care systems? Do we have the skilled workforce needed to run the system into the future?

Sustainable healthcare

Healthcare is already the largest and fastest growing component of spending by many governments. Indeed, a simple extrapolation of trends for some jurisdictions would see it consume entire budgets by the middle of the century! This is clearly not sustainable. That is not to suggest that there is anything “wrong” with rising demands for healthcare in increasingly affluent and older societies such as ours, just that the willingness or capacity to pay for it cannot be ignored.
Healthcare represents an interconnected “system”, one dominated by government financing and regulation for good reasons. However more than one level of government is typically involved, presenting one potential source of system failure, and there is private and not-for-profit as well as public participation, which presents another. Moreover, while medical care is by its nature costly, with technological advances driving cost increases, there are few price signals to convey this to consumers, or to encourage cost reduction by providers.

A number of major inquiries and reviews over the years have sought to find ways of achieving a better functioning system which can meet both equity and efficiency goals. The most recent in Australia was the Bennett Commission of 2009, which contained many useful ideas. But few reform recommendations make it through the political filters in this sensitive area. And those that are favoured do not always account for impacts on the system as a whole. The national roll-out of an activity-based funding regime for hospitals in Australia remains contentious. And the (re-)introduction of co-payments for primary care even more so. In political debate, the weight of dollars and views of particular interests often dominate more complex considerations of efficiency and equity.

Meanwhile, life must go on for those managing or otherwise employed in current systems. And a variety of studies and comparative performance data suggest plenty of scope for improvement. A report by the Productivity Commission for COAG some years ago found that overall improvements in productivity of 5% were achievable, without lowering standards. In relation to hospital care, for example, there remains potential to improve cost-effectiveness in areas such as process logistics, practices of care (just avoiding well-evidenced poor practices), workforce demarcation (doctor or nurse?) and materials procurement.

Given the size of the sector, even small improvements can make a big difference over time. Why are the potential gains not being realised? What can or should public managers do about it?

There is undoubtedly also potential to realise better the old adage about “prevention” — the motivation for public health strategies in both New Zealand and Australia. However, more work is needed to determine cost- effective strategies (accounting for all costs). In Australia, the national agency principally charged with this was recently disbanded. What is needed to make advances in devising cost-effective prevention? What should be the role of government here and at what level?

Implementing a new deal for disability

Over the past few decades, pensions for those finding themselves incapacitated for their primary profession or trade (the ubiquitous “builder’s back”) became more accessible and more generous. At the same time, people suffering profound disabilities with congenital or otherwise “uninsured” origins (such as cerebral palsy or paraplegia) have often been ill-served by systems which, in Australia, the Productivity Commission’s 2011 report described as “underfunded, unfair, uncertain and inefficient”.

The rectification of this, which has broad community support in principle, requires more responsive systems and (much) more public money. The extent of the latter — and arguably the sustainability of the scheme itself — depends in large part on the design of the former. The most crucial design features, including screening and monitoring mechanisms, in turn need to be tested and modified through trials.

That process was significantly truncated for Australia’s highly innovative National Disability Insurance Scheme, with the recent independent review describing the result as like “a plane that took off before it was fully built and completed while in the air”. Without returning to base — to continue the analogy — the outcome of this premature launching of the NDIS rests with its crew.

What complexities and risks do administrators face as a consequence of such “false starts” and how can they best be managed? Are the problems here reflective of a more general failure to consider implementation issues when policies are being devised and launched? If so, are there wider implications for government processes (or is it an inevitable by-product of modern politics)?

Harnessing multiple players to enhance outcomes

In each of these areas, responsibilities for funding and/or delivery involve more than one level of government and there is scope for the private and third sectors also to play a key role. Both dimensions hold promise of more cost effective services through activities being performed by those best placed to do so, with the important proviso that the arrangements are well structured.

Working across jurisdictional boundaries

The lament within Australia’s federation is that, instead, we see either duplication or gaps in provision, with “cost and blame shifting” having become a cliché to describe observed patterns of behaviour. While there have been successes in coordination, and in the reassignment of some responsibilities (eg: trade practices, industrial relations), in many areas roles are contested in ways at odds with the usual benefits of competition.

The Australian government has signalled an intent to withdraw from some key areas where federal involvement has expanded over time, such as school education and parts of healthcare. What degree of separation is achievable and what will it mean for administration in those areas? Can anything be learnt from how things were done previously? Is there potential for Australia to learn from other federations? Unitary states also have regionally devolved powers and responsibilities, including New Zealand. While systems differ, all countries face challenges in successfully working across boundaries, and mechanisms found to work in one country may have relevance for others.

‘Partnering’ with other sectors

The growth of government and the roles it has assumed have in large part reflected a perception that there was little real alternative to it both funding and delivering services such as health, education, corrections, energy, water etc. However, the growth and increased sophistication of the private and not-for-profit sectors has changed that, and governments have increasingly sought to share the load. In many areas of public service, private firms and community sector organisations have become major players.

An early motivation in infrastructure partnerships and the contracting out of human services was cost-cutting and constraints on public finances. The results were on the whole less satisfactory than anticipated, with innovation often poor, quality below par, and much of the risk still borne by government. This experience has been salutary about the potential contribution of such partnerships, and how they should be arranged to align incentives. Understanding the role and contribution of different parties and how they can be realised through contractual and communication mechanisms is key.

More generally, recognition has been building that governments need a more coherent approach to partnerships with other sectors; that they need to be able to come to an informed view about what services should be publicly supported in the first place (and to what extent) and which players and institutional arrangements would work best in particular situations or categories of service, before going on to assign responsibilities and devise “rules” that are fit for purpose.

Questions that arise from this emerging view of government as “facilitator” of public services — overseeing a public service economy (Sturgess) — include how to define deliverables, structure decisions about who designs and provides these (market-based contestability, co-production, contracting …), motivate “good” innovation and efficiencies, and monitor outcomes against objectives. As John Alford’s research shows, governments also need to detect and address road blocks within their own administrations, and remedy public service cultures resistant to “letting go”. How are we doing? Where are we making most progress? What more is needed?

The state as ‘investor’

In securing national prosperity, governments must go beyond a focus on welfare and community services, to the building of economic capability. Here again the issues relate at least as much to the form and allocation of any spending as to their levels, which in aggregate have generally risen significantly over time.

The education imperative

Both theory and available evidence suggest strongly that education is crucial not only to economic performance, but also to the “inclusiveness” of the growth process. Yet the evidence also suggests that Australia and New Zealand have been slipping in key areas, despite the heightened political attention over recent years. In literacy and numeracy, the foundation skills on which most others depend, our international rankings, while still middling, have started to decline, and disparities across SES groups remain relatively high.

Among the potential contributors, teacher ‘quality’ and how teachers are deployed within educational systems are generally seen as the most important. Declining entry scores and lack of subject expertise, particularly in maths and sciences, appear to be taking their toll. And recent reviews suggest that an inability to properly manage and motivate the teaching workforce, and in particular deal with underperformance, has not helped. How has this come about? What former Finance Minister, Lindsay Tanner, once described as “producerism” — the interests of providers and their representatives acquiring institutional precedence over users — is an explanation increasingly proffered here.

These and other issues are starting to be addressed, with New Zealand and some states in Australia venturing into areas found to be successful overseas, including the devolution of school governance within public education systems (giving principals more power and parents more say) and devising differential remuneration arrangements to address areas of critical teacher shortage (within what has otherwise become an excess supply).

The Australian government has also undertaken initiatives in these and other areas. Some of these have acted at cross-purposes with state initiatives (eg performance-based remuneration). Most recently, as noted, the Australian government has signalled a withdrawal. How far can or should this go? Among other things, what does it mean for the troubled nationalisation of school curricula, currently being revisited?

And then there is higher education, a system that has evolved considerably in Australia since the so-called Dawkins Revolution of nearly three decades ago and, following the liberalisation of fees and other changes, is set to evolve further. Universities have responded to the incentives of their hybrid funding system by favouring exports and scale. How will they now position themselves? And how will young Australians, particularly those from poorer families, view the options, given changing subsidy arrangements? Can we look to a greater focus on quality and choice? Better service for domestic students across the talent and income spectrum? Lower or higher prices? What role remains for regulation?

The infrastructure gap

Economic infrastructure — transport, communications, energy and water — provide services that are crucial inputs for businesses and households alike. Traditionally these services were dominated by public sector monopolies (the “utilities”), and by the 1980s their high costs and poor quality had become a major drag on community living standards in both Australia and New Zealand. Commercialisation, corporatisation and, latterly, privatisation have since transformed utility performance, and remaining issues have more to do with the scale and allocation of additional public investments, and how private players are contracted and regulated.

A lack of infrastructure is currently being seen as an impediment to economic progress. While Australia’s federal budget involved cut backs in many areas, infrastructure spending was expanded and additional state government spending leveraged. The extent of a shortfall (at least in aggregate terms) is contested, however, with historically high rates of spending on infrastructure recorded over the past decade.

The reality is that infrastructure is no panacea in promoting prosperity. Its contribution depends on it being the right infrastructure, occurring at the right time and place, and provided in the right way. Decisions about each of these have left much to be desired and, as independent studies have shown, much taxpayer money has been wasted. Given the scale of spending and longevity of the assets, the opportunity cost to society of inefficient infrastructure investment is high.

This is an area where public administrators have much to contribute. For one thing, they need to do what they can to ensure that spending decisions can be informed by robust cost-benefit assessment, that remaining public entities are well governed and their services properly priced, that appropriate “risk sharing” is achieved between the public and private sectors, and that regulatory arrangements do not stifle private infrastructure provision itself. Past deficiencies in the allocation of spending prompted the creation of agencies dedicated to illuminating the priorities. How well have these been working? What more can be done to improve public administration and process in this important area? And where public private partnerships are used, how can these be configured and managed to avoid the mishaps of the past?

Rethinking industry assistance

The economic history of New Zealand and Australia was dominated for much of the twentieth century by a protectionist bent that ultimately undermined economic performance and community living standards in both countries. While the traditional instruments of industry assistance, namely tariffs and import quotas, have over the past three decades been greatly reduced, other forms of assistance have flourished in Australia. Of total gross industry assistance of some $17 billion in 2012, just under half was accounted for by tariffs (considerably less in net terms), the balance comprising financial subsidies of various kinds.

Some of these subsidy programs address legitimate market failures, but many don’t and, of those that do, the efficacy of some is doubtful. Relative to import restrictions, the welfare costs are generally less, but the transfers are more transparent. As a result, recent fiscal problems have seen a harder line being taken in Australia where a sufficient quid pro quo for the community could not be demonstrated. The refusal to continue topping up taxpayer support for the foreign-owned auto industry is the most important example, given the industry’s long run of preferment under all previous governments. New Zealand, having had less capacity to dispense financial assistance to struggling industries, has had less need for corrective action.

Churchill’s famous comment that a reformist government should “never waste a good crisis” clearly resonates here. But even after a relatively stringent Budget, much assistance remains in place federally in Australia, and more is provided by the states. It is reasonable to ask that the benefits this provides to the community be regularly demonstrated. More to the point, what should be the focus of industry policy now that it is becoming clear even to the public that much past assistance mainly served to support the profits and wage levels of firms with little future? How does one balance market failure and government failure in this conflicted area of policy and administration, in which self-serving claims are often cloaked in public interest rationales? What conceptual frameworks can best guide public servants in advising government and exercising discretion under existing programs?

The holy grail of ‘better regulation’

Notwithstanding the impetus to strengthen the regulation of financial markets in the wake of the Crisis, there is a growing recognition of the burdens as well as benefits of regulation and the need to strike a balance. For example, in Australia, the volume of Commonwealth legislation since 1990 has been about 10 times greater than in the nine preceding decades since federation. The cost of the associated “red tape” alone is variously estimated to amount to tens of billions of dollars.

In both New Zealand and Australia, a variety of “red-tape busting” exercises have been conducted in recent years. And changes have also been made to enhance systems for making and reviewing regulations, to determine whether they are and remain “fit for purpose”. For example, recent Australian initiatives include red-tape reduction targets, “deregulation units” within all departments, senior officials’ remuneration linked to meeting regulatory objectives, designated repeal days in Parliament, and strengthening of processes of regulation assessment.

The experience here and in other countries is that while such initiatives commence with fanfare and commitment, over time they tend to become eroded or degraded in the face of administrative inertia and recurring political pressure to “regulate first, ask questions later”. How robust and sustainable are more recent changes? To what extent have past regulatory failures been attributable to process failures and what responsibility do public officials have for these?

There is also recognition that much regulation could be designed in ways that achieve their ends both more effectively and at lower costs, including by focussing more on desired outcomes and less on the detail of how these should be achieved, and on “nudging” rather than “controlling” the decisions of target groups.
Are the skills needed by such systems adequately on tap in public administrations? Do institutional innovations like the UK government’s “Nudge Unit” that has been replicated in New South Wales, need to become more widely adopted?

Meanwhile, regulators are obliged to operate under rules that are often unsatisfactory, and exercise discretion in circumstances where they will receive little notice for things going well and much criticism if anything goes “wrong”. Moreover, like other parts of government, they are increasingly subject to budgetary constraints. How can regulators most effectively deliver “public value” in such settings? Have risk-based and “responsive” strategies shown the way forward?

What does all this mean for public managers?

The developments in policy and practice that are underway may see some deviations from course or even reversals, as has happened in the past, but the general direction seems clear. The hallmark of government in the 21st century will be doing less and doing it better. We should expect a further retreat by governments from activities that other sectors can adequately discharge. And we can expect an approach by government to the rest that lays emphasis on facilitating cost-effective provision, drawing on the skills and capacities of all three sectors — while enabling more choice and “control” (and greater contributions) by those citizens who qualify.

Moreover, while co-operative arrangements for the design and delivery of public services and support are likely to expand, the over-arching policy frameworks can be expected to lay more emphasis than before on avoiding perverse production and employment incentives. This is likely to be imperative in an increasingly competitive world, where a diminishing share of our domestic population is of working (tax-paying) age.

The reform challenges posed for government administrations are of two inter-related kinds: those that relate to structural changes within the public sector; and those that relate to new or amended policy interventions that affect other sectors, whether by subsidy or regulation.

Restructuring and other administrative reforms have a long history. How do the more recent ones compare? What are the lessons from past exercises, only some of which appear to have had a lasting impact, or been judged successful, while others have been short-lived or eventually reversed. The amalgamation and separation of functional responsibilities is one such area; processes devised to improve “whole of government” decision-making another. Do we understand why some administrative reforms succeed and others fail? Clearly changes that address a real problem, that have a clear rationale and that are designed with a view to their effective implementation should be more likely to succeed. How can such pre-requisites be engineered?

Implementation has also been crucial to the success of past policy and program reform efforts. To state the obvious, reforms that withdraw benefits are many times harder politically than conferring them in the first place. This ups the ante on government to explain why particular changes are needed and how these would promote our longer term interests. Success will depend not only on how well they communicate the need for action, but also on the capacity of their administrations to furnish the supporting evidence and analysis. And, ultimately, if new arrangements are not well administered “on the ground” failures and reversals are more likely.

So what skills are likely to be needed by public servants and their managers to match governments’ evolving role in the 21st century? This question is increasingly being asked by governments around the world, a number of whom are already devising strategies to address current deficiencies.
If government is to be more “facilitator” than “doer”, then facilitation skills will obviously assume greater significance. That means skills in assessing how services can be most effectively delivered in a “public service economy” and by whom; skills in commissioning and procurement; and skills in managing projects and relationships, and the monitoring of performance to ensure appropriate outcomes.

Second, the wider policy and regulatory challenges will require strong analytic capabilities, including in evaluating the costs and benefits of different courses of action. And a public service economy beset by rapid change and rising public expectations, will require flexible systems and adaptable leaders. Finally, if public trust is to be sustained throughout, effective processes for engaging citizens and explaining the basis for decisions that affect them will remain fundamental.

On occasion, Peter Shergold has cited science fiction writer William Gibson’s declaration that: “The future is already with us. It’s just not evenly distributed yet.” If that is so, how should our governments best proceed and, importantly, learn from each other in meeting common challenges of this new century? That is a key function of ANZSOG’s conference, and indeed of ANZSOG itself.

This is a background paper for the ANZSOG annual conference in Canberra on August 5-7.

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