QCU Government Services / Revenue Forum (2003)


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On 2 April 2003 a Queensland Council of Unions (QCU) Forum in Brisbane reported useful advances in understanding of Queensland's public finances and related issues. This document provides an overview of the Forum, an outline of the proceedings, as well as CPDS comments, both general and [detailed], on the issues raised.

OVERVIEW OF FORUM

In 2002 the Queensland Council of Unions initiated a debate and also sponsored University of Queensland research on state government revenue and expenditure.

John Battams, the QCU's senior Vice president, told the Forum that QCU had become concerned because public services had been squeezed financially for 20 years though demands have been rising. Moreover Queensland suffered a chronic under-investment in non-financial public assets and has had bi-partisan political support for low taxes. Research by the Social Research Centre highlighted: Queensland's traditionally low revenue and expenditures by national standards; its increasing expenditures in the 1990s; and its inability to sustain this without increasing revenue. The QCU has raised these issues in a 2003/04 Budget Submission to the Queensland Government which seems likely to result in serious discussions.

Professor Paul Boreham from the Social Research Centre outlined the complexities of increasing revenues in terms of the need to: fund services while also attracting industry; evaluate the social impacts of particular taxes; recognize the costs of not providing services; and consider national taxes (which have been quite low by international standards) because states depend heavily on payments from the Commonwealth.

Associate Professor Geoff Dow then discussed public spending as The Price of Civilization. Queensland's financing problem, he said, has been self-imposed, but now poor wages and public services are inconsistent with being a 'Smart State'. The financing problem has increased as unfunded functions have been transferred from the Commonwealth. Australians seem unaware that the public sector's share of GDP rises in all societies because wealth, urbanization and industrialization create problems and opportunities that require public sector solutions. Under-funding in Australia has made it impossible for governments to respond to citizens' expectations - especially in relation to unemployment. Modest tax-funded increases in public capital formation (eg about 2% of GDP) might make a major difference. Neo-liberal economic policies have been advocated as solutions to such problems, but have been inadequate. The decline in public sector spending in Australia stalled in the 1990s - but public capital spending remains about half the OECD average. Governments and bureaucracies need to focus on real development of the nation rather than on formalities and idealistic theories.

The fact that is no easy alternative to paying for good services was the core of two addresses by Australian Research Council Professorial Fellow, John Quiggin.

First he discussed Queensland's problem. The state needs greater revenues as it transitions from the low taxes and services of the Bjelke Peterson era (and an economy based on low skills, extractive industries and tourism) to a 'Smart State' characterized by higher levels of skills and services. The Grants Commission developed ways to assess states' expenditure needs, capacity to raise taxes and tax effort. Queensland's expenditures have been low in the past, but are now near national averages. However its tax capacity, tax effort and revenue are all low. This gap has been covered by returns on investments that are unreliable. Queensland also needs more revenue because, though its financial assets are relatively strong, its non-financial assets are relatively low. Also Commonwealth compensation to states such as Queensland because of their weak taxation capacity is under challenge by major states.

Second he suggested options to deal with these challenges. Taxes and public spending were described as fundamentally a political choice. An anti-tax bias has emerged over the past 20-30 years. However public opinion about this is not fixed, and political support has recently been going to governments who have raised taxes and levies. The key issue to be addressed in financing improved services involves increasing Commonwealth revenues and transfers to the states. Other options might include: more sensible use of debt to overcome deficiencies in state assets; reviewing unproductive business incentives and fuel subsidies; and the introduction of special purpose taxes.

Treasury's view of public financing were outlined by Gerard Bradley. He noted that Queensland has defined fiscal principles which, for example, include competitive (rather than intrinsically low) taxes. He also outlined Queensland's fiscal position and its recent exposure to poor investment returns. Revenue is highly dependent on Commonwealth payments because of Australia's vertical fiscal imbalances. Only the 27% of receipts from state taxes, fees and fines are readily subject to state control. Revenue options have been further constrained recently by High Court decisions and National Tax Reform which introduced the GST. Also Queensland's GST share might be cut in a 2004 relativities review. Though Queensland's revenue effort was low, it has been increasing; and though some tax rates are low, others are not. For example, if fuel subsidies were cut, registration fees would have to be reduced to come into line with other states.

Efforts that have been made to use private finance to extend the resources available for infrastructure through Public Private Partnerships (PPPs) were described as spurious by John Quiggin - because they might only shift debt 'off-balance-sheet' a device that caused an accounting scandal when practiced by Enron. He further criticized Queensland's PPP guidelines on the grounds that: the cost of risk is easily misallocated; the higher costs of private capital is ignored; the public sector comparator used is biased; gains through private delivery may be achieved at workers' expense; and the whole process can deprive the public sector of the skill base required for effective governance.

Finally an account of the poor state of public services in the UK was presented by Margie Jaffe, a UNISON research officer who specializes in the UK's Private Financing Initiative. She noted that PFI's, which are similar to PPPs, affect all areas of government and have virtually become the universal mode of procurement. Numerous problems are seen to be associated with PFIs. They are driven by an accounting trick to give the appearance of low government debt by moving financial obligations off balance sheet. Costs seem to be higher - due to consultancy fees, more expensive capital and high profits. Despite this, tests have been set up so that the PFI option always seems to represent value for money. With higher costs, government agencies find they can not afford services, and so cut standards. Other problems that appear to arise include: refinancing to increase profits after deals have been put in place; all risks being carried by government; a lack of innovation; conflicts of interest affecting those who gain large fees from advising government about PFI; secrecy about schemes; and 25 year contractual commitments that are unable to cope with policy changes.

OUTLINE OF FORUM PROCEEDINGS

Introduction: John Battams
Queensland Council of Unions

In 2002 QCU initiated a debate on government revenue and expenditure. Unions favour good public services - in which states play a key role. Yet for 20 years funding has reduced as demands have increased. The GST will not make any significant difference. Queensland has a rapidly increasing population and a chronic underinvestment in assets. All political parties support low taxes. QCU has commissioned research by the University  of Queensland's Social Research Centre - which has resulted in a 2003/04 Budget Submission. Key issues that have emerged are that: (a) Queensland traditionally only raised 80% of the revenue of average Australian states, and until the 1980s its spending was 80% of the average (b) in the 1990s spending increased to 90% of the average without increasing revenue. Other ways to cover the gap have been tried (eg PPPs, user pays). These arrangements often benefit larger corporations and the wealthy. Given that the state government must find additional funds, the purpose of the Forum is to identify options for doing so.

QCU 2003/04 Budget Submission

Background: Over 2 decades states have faced increasing budget problems due to growing services and declining transfers from the Commonwealth. Queensland has special challenges because (a) its population, employment and economic growth has been faster (b) it has more favourable financial balances but relatively low levels of physical assets and (c) it is making a transition from an economic strategy based on low taxes, low service and resource exploitation to a 'Smart State' requiring higher service standards, but this transition is more complete for expenditure than for income

Infrastructure and public sector net worth: Infrastructure is a problem for all states - but especially for Queensland whose 1.75% pa population growth exceeds the 1% pa national average. With $45bn in non-financial assets, net investment of $800m per annum is needed to maintain existing levels of non-financial assets per person. Budget projections only just achieve this. But existing non-financial asset levels are well below the national average (around $11bn overall).

Are PPPs the Answer? State Governments have been increasingly interested in Public Private Partnerships based on the British Private Finance Initiative (PFI). However this mechanism (which basically involves shifting debt off balance sheet in the manner of Enron) can not solve the problem of financing a growing infrastructure program within arbitrary debt limits. Though it is claimed that PPP schemes can deliver infrastructure services at lower costs, many such savings have been achieved only at the cost of lower wages and conditions for employees. There is also an ideological assumption about the superiority of the private sector that is not supported by empirical evidence. The QCU opposes the use of PPPs to correct the current infrastructure deficit.

The Under-gearing problem: Low levels of debt are seen as desirable - though this involves foregoing investment. Queensland has negative net financial debt. For most of 20th century debt levels of states have been much higher without risk of default associated with over-gearing. Low levels of debt are seen as conferring a good credit rating (a benefit that modest borrowing would not threaten). However the credit rating emphasis arose when financial markets were seen as infallible sources of economic wisdom - a view that no longer exists. With low debt levels and low levels of physical assets, Queensland is clearly under-geared. A goal could be to raise levels of physical assets to the national average, and to bring net financial debt to around zero. Reducing financial assets would reduce income, and require that some non-financial assets produce offsetting revenues.

Funding the Smart State: Under the Bjelke-Peterson government Queensland pursued a growth strategy based on low taxes, low service levels and exploitation of natural resources and tourism. In the 1980s revenue and expenditure effort for Queensland was about 80% of the national average. This strategy implied that Queensland would follow a low-skill, low-wage path, characterized by a branch-office economy and a narrow industrial base. The Goss and Beattie Governments have replaced this strategy with a 'Smart State' strategy based on highly skilled and educated workforce, and on high quality public amenities and community services. [Smart State] This has been reflected in a growth in expenditure to 90% of the national average - but there has been no corresponding rise in revenue effort. Favourable circumstances (strong investment returns and a housing boom) allowed government to raise expenditures to close to the national average. But this cannot persist, and fiscal strains are emerging. The only sustainable response is an increase in revenue effort - starting with a review of concessions not available elsewhere such as $450m pa fuel subsidy. As an input to business costs, the latter program has high costs and few benefits.

Compliance Issues: Compliance problems have been growing over the past decade - eg expansion of spurious 'contracting'. Payroll thresholds also allow subsidies for converting employees into contractors

Commonwealth Transfers and the GST: Australia's federal system is characterized by high vertical fiscal imbalance [VFI]. Most major taxes are paid to the Commonwealth, but states have many key spending roles. This necessitates substantial transfers, and these have fallen relative to GDP since 1980, and increasingly been treated as special purpose payments (SPPs). Introducing the GST will do little to help. States were guaranteed to at least receive what they would have under old arrangements, and GST revenue will not exceed this in Queensland until 2004-05. Queensland will receive little under the New Tax System package - because of previous low taxes. It continues to pay the price of those low taxes without receiving any benefits. Even when GST revenues exceed current arrangements, any increase will be illusory as discretionary SPPs can be adjusted to offset any gains. As before transfers to the states will continue to be determined by the Commonwealth and receive lower priority than tax cuts or direct Commonwealth spending. A fairer allocation of revenue is needed.

Business Subsidies as Fiscal Policy and Industrial Strategy: All states provide industry incentives to promote development. The Productivity Commission recently suggested that this was unlikely to often be useful - and this view is also widely held by economists with quite different philosophies. Queensland should enter into discussions to end 'auction' to attract new business and sporting events.

Concluding Comments: Given current Commonwealth / State financial relationships state governments have little capacity to raise revenue and re-order priorities. This highlights the importance of considering available policy options. It is impossible to have public services levels above the national average with a tax effort below the average. A review of Queensland's tax effort is needed in open consultation with the community.

Revenue and Expenditure Issues - Paul Boreham
Social Research Centre
University of Queensland

Queensland has two dilemmas in providing services - (a) to provide services equivalent to those in other states and (b) to maintain a 'low tax state' mantle to attract industry - in an environment in which all states compete and there is little economic effect from such action. Also when public services are not provided, people then have to get them from private sector - and this is not free. Taxes need to be reviewed - noting that some are socially regressive, while others (eg on gambling) are ethically dubious. There is also a need to consider the Commonwealth's situation, as Australia is 25th out of 30 in overall tax rates. The social costs of low public spending also need to be considered.

The Price of Civilization - Geoff Dow
School of Political Science and International Studies
University of Queensland

The Problem: Queensland revenues are in crisis because of a gap between taxes paid in Queensland and the national average - a self imposed problem. The pressure increases daily. Retrieval of even half the revenue shortfall would fund 8-9% increases in wages and salaries to government employees. Queensland can not be credible as a 'Smart State' when employees receive only 95% of average national incomes, and services do not keep up with demands. In all societies the proportion of activity subject to political decision increases - a fact that has not been recognized in Queensland. Other states also have problems meeting services costs. Many functions have devolved from federal to state governments, while federal payments to states have declined relative to all federal spending. The public sector is thus under-funded - and Australia has long been a low tax nation so its polity has been unable to respond to demands of an increasingly sophisticated, internationally engaged, culturally diverse citizenry. The problem is not just low finance, but an institutionalized inability to recognize the need for public spending to increase relative to GDP. [Effective governance] In Australia governments spend less that 32% of GDP - relative to the OECD average of 38%. A low-tax fixation has national costs - but this can not be addressed by states as their revenue options are generally regressive.

The arguments: Australia's commitment to small government grew in 20th century. Before WWI Australia had the world's highest per-capita incomes and the relatively largest public sector. Now governments can not do what people want - and this shows up best in unemployment. Unemployment has been above the OECD average for 30 years, despite arguments that micro-economic reform etc would improve economic outcomes. Neo-liberal policies have been intended to recast the world into a mould dictated by abstract model not derived from goal of policy or what has worked in nation building. The internationalist experiment is justified by concept of universal model of privately managed and market oriented economy - which should be adopted irrespective of industries, public preferences, policy traditions, past protection of competitive opportunities. For 500 years people were told that they could control their destiny through politics - but the neo-liberal view is different. This ignores the view that: markets are good servants but bad masters; market regulation does not account for how economies have actually developed; non-economic underpinnings of economic activity are critical; and the destructive effect of unwarranted economic changes need policy attention [Neo-liberal economics]. The decline in public spending in Australia may have stalled in the 1990s - while social transfers have increased. The long term growth of government is due (according to Adolph Wagner) to the fact that wealth, urbanization and industrialization bring forth new problems and opportunities requiring distinctly public sector solutions. Countries create problems for themselves if they don't finance this. In the 1990s Australia's public capital spending was (a) 2.3% of GDP compared with OECD average of 4.5% (b) 14% total public sector outlays compared with 20-30% and (c) 21% of total capital spending rather than 50%. Public capital spending has the most direct effect on unemployment  - and a small increase in capital formation could lead to large falls in unemployment [Public capital spending]

The solutions: An increase of 2% of GDP in public capital formation funded from taxation would virtually eliminate structural unemployment - while still leaving Australia one of the most under-taxed rich countries. This would not come from the multiplier effect of such capital expenditures, but from generation of new industrial activity. There is a need to recapture the spirit of nation building that prevailed from 1945 - when politicians and bureaucrats were focused on actual rather than imaginary, substantive rather than formal policy and goals. For example, spending $14bn on a VFT between Sydney and Melbourne would stimulate the engineering sector - and related industries. It has been claimed that declines in public capital formation since the 1950s account for Australia's poor economic performance in recent decades (high unemployment, manufacturing decline, increased inequality). Low taxation and weak public capacities deny the nation the acumen to resist unwanted structural changes originating outside. [Effective Governance] A failure to recognize that the purpose of policy is to achieve changes that would not have occurred spontaneously has contributed to under-development of the polity. Queensland policy-makers can not take responsibility for national macro-economic management - but the view that low taxation is desirable is a problem. International evidence does not support the view that de-regulated, flexible, liberalized market-oriented conditions and policies produce good economic outcomes. [Market economy?] There needs to be pressure to abandon the view that under-resourcing government has mainly beneficial outcomes.  [Size of government]

Tax Revenue and Public Expenditure in Queensland (A) - John Quiggin
School of Economics & School of Political Science and international Studies
University of Queensland

To get a good public service one must be willing to pay for it. The easy ways out that governments have sought are mirages. Constraints have been set through (a) 'golden rule' that budgets should balance over the business cycle (b) accrual accounting - which allows a clear separation of capital and recurrent expenditures and (c) whole of government approach - which includes a distinction between general government spending and public enterprises which prevents generation of revenue by market manipulations [Accrual accounting]. In Bjelke Peterson era Queensland was characterized by low taxes, low services, low skills and by extractive industries and tourism.  In the Beattie era, it is seen as a 'Smart State' characterized by high service levels and a need for increased revenue [Smart State]. The Grants Commission has developed methods to assess states' expenditure needs, tax capacity and tax effort. The latter has been low in Queensland. The Grants Commission has sought to compensate for differences in expenditure needs and tax capacity [Grants Commission]. Queensland's expenditure levels have been historically low, and are now close to the national averages [Increased spending]. They are characterized by (a) above average concessions and assistance to business - which seems to be economically ineffectual (b) low in terms of quality of life functions and (c) ever increasing divergence in these respects since 1996. Queensland's tax capacity has been about 90% of the national average, and its tax effort around 90% also - with revenues around 70% of the average. Other states have objected to Grants Commission transfers.  Key points are that: (a) payroll tax is a good tax - but is only 70% of national average in Queensland and (b) fuel subsidy costs $450m. Expenditure / revenue gap in Queensland has been filled by non-tax revenues, namely (a) investment income and (b) returns from GOCs - which may not be sustainable. Queensland has a strong fiscal position - though not as strong as believed. Debt position is favourable, but net worth is not high. Queensland can not assume that it will continue receiving non-tax revenues. At present low spending policies have been abandoned, but low taxes continue. This is unsustainable.

Overview of State Government Revenues - Gerard Bradley
Queensland Treasury

The adoption of accrual accounting required a formalization of Queensland's tax strategy, and five fiscal principle are currently adopted. These involve: a competitive tax environment (which does not necessarily mean low taxes); provision of affordable services (involving no accrual deficit in providing services to ensure sustainability); policies on capital financing (which now have reversed earlier objections to borrowing for social investments); management of financial risk (including fully funding liabilities); and building net worth of state. Queensland spends $20bn pa, mainly in large service areas like health and education. Research is being done into future service demands. Salaries are about half of spending, while transfers to other bodies account for a further 25%. Level of service provision lifted relative to other states in the 1990s. Capital spending is financed by depreciation and borrowings. Queensland has had very high levels of public capital spending - though this increases and decreases.  Queensland's fiscal position has been hit by poor recent returns on state financial assets. Services have not been changed as a result - so asset values have been reduced. 51% of revenue comes from the Commonwealth reflecting Australia's vertical fiscal imbalances. 27% is derived from state taxes, while 11% involves return on assets (about half each from GOCs and from financial assets). Revenue from GOC's increased during 1990s, but this is now constrained by National Competition Policy.  States have limited revenue policy digression as: Commonwealth payments account for about half revenues; financial asset returns (11%) are market driven; user charges (7%) are fees for services; royalties (4%) are partly set by state and market. State policy determines only the 27% gained from taxes, fees and fines.  Restrictions on state financial options have been increasing as a result of High Court judgments (eg those invalidating state taxes on fuel, alcohol and tobacco) and National Tax Reform (which replaced several state taxes with the GST). In return for GST, states: gave up general assistance grants; had to pay the administration costs; and have to fund the first home owners scheme. There will be no net gains for Queensland until 2003-04.  A five-yearly relativities review in 2004 by Grants Commission may reduce Queensland's GST share (which has been high in per capita terms). Queensland has had a relatively low tax effort - but this has been increasing especially as others states' Financial Institutions Duty was abolished. The revenue effort has been low in terms of Land Tax, Payroll tax - but high in some other areas. If Queensland's fuel subsidy were eliminated, there would be a need to cut registration fees that are relatively high. Efforts have been being made to protect revenues by stricter compliance efforts. Overall the situation is that states have big responsibilities and limited financial options - a situation that National Tax Reform has made worse. [Financial status]

Tax Revenue and Public Expenditure in Queensland (B) - John Quiggin
School of Economics & School of Political Science and International Studies
University of Queensland

The core fact is that: you get what you pay for; public private partnerships (PPPs) do not provide a 'free lunch'; and one can not combine high service levels with low taxes. Principles in the politics of tax and public expenditure are that: this is fundamentally a political choice; a trade-off has to be made between household disposable income and community services; resources for public services have tended to increase over time; but anti-tax politics have emerged in Australia since the 1970s. Anti-tax policies emerged in tax revolt of 1970s - where inflation and bracket creep may have contributed to resentments. Queensland cut death duties - and led in an interstate competition for lower taxes. A Tax Summit in 1984 led to personal tax reform and capital gains taxes. Difficulties in introducing the GST were very apparent in the 1980s and early 1990s. Public opinion about taxation has varied (with anti-tax views rising and now declining; and responses very dependent on how the question is asked). Most people would be happy to pay more for health and education, but do not favour welfare spending. Federally Labor has run anti-tax strategies since 1996, while the Howard Government has raised taxes and levies. Issues that might be reviewed to finance improved services could involve: (a) Commonwealth / State financial arrangements - which is the key issue; (b) the use of public debt; (c) business incentives and the fuel subsidy; (d) hypothecated (dedicated) taxes; and (e) tax effort. Commonwealth / State financial arrangements are unsatisfactory because of (a) the vertical fiscal imbalance, and the Commonwealth's disinclination to increase taxes and then just hand money over (b) the GST deal which did not result in increased funds. The central focus of any policy initiative should be to increase Commonwealth revenue and transfers to the states. Low public debts may be good, but not at the expense of good investment. A household analogy for PPPs would involve people with large amounts in the bank who live in a rented house. A business analogy would involve an under-geared company. Queensland has negative net debt, but its net worth is only average. Thus its level of real assets in very low. Special incentives to attract business are dubious policy. Fuel subsidies involve a major cost - but no visible benefit. Better resource allocation seems to be possible.

Financing Infrastructure for Queensland - John Quiggin
School of Economics & School of Political Science and international Studies
University of Queensland

Public private partnerships (PPPs) are not 'magic pudding' solutions to the problem of financing public infrastructure. [PPPs] PPPs emerged from the fiscal difficulties experienced in the 1970s. Public investment was restricted - and there was a (largely spurious) view that private funds could replace this. Governments had always used private financing (eg via sale of bonds). However this was extended to encompass: sale and leaseback; quasi-private infrastructure; build-own-operate-transfer (BOOT) schemes, etc. All have proven unsatisfactory. They only provide an appearance of reducing state debt. Risks are often mis-allocated (eg NSW Department of Transport had to pay for Sydney Harbour tunnel irrespective of traffic volumes). Apparent gains are often achieved by transferring costs to workers. In the UK the Private Financial Initiative (PFI) was originally designed to give the impression of reduced debt. New Labor shifted the focus to managing risk allocation. PPPs now involve a defined system - rather than being once off. This system is generally based on Partnerships Victoria that was derived from the UK's PFI. These arrangements do not result in extra money, or achieve real reduction in debt. They commit government to a stream of payments that are equivalent to government ownership.  Problems in PPP guidelines include: (a) spurious reduction in debt (debt is exchanged for leases; this is similar to private sector actions that led to accounting scandals) (b) incorrect treatment of risk - because public sector is often the sole purchaser or guidelines want private sector to carry demand risk while public sector has a large influence (c) the higher cost of capital is ignored - as an equity premium is assumed on top of actual public capital costs, which is not explained by conventional economic analysis or clearly applicable to public sector debt  (d) the public sector comparator that is used is biased - involving an arbitrary assumption of 20% private cost savings, limited allowance for gains in public sector efficiency, and temptation to manipulate the figures where project will not proceed without PPP financing [Public Sector Comparator] and (e) gains are often achieved at workers expense. PPPs are likely to be desirable where: risky innovations in design and construction are involved; and there is a close link between design and construction; services are sold directly to the public (ie government is not the customer). Firms who package PPPs in exchange for high fees are simply depriving the public sector of its skill base. [Effective governance]

PPPs: The UK Experience - Margie Jaffe
National UK PFI Project Officer
UNISON, UK

There is a great deal of pseudo-scientific mumbo-jumbo about this. The UK's Private Finance Initiative (PFI) is not just about assets, and is not just about finance. It involves design, building, financing and operating over a 25 year period. It transforms government agencies from the owners and operators of assets into the purchasers of services such as health and education - which is like privatization. It is a form of procurement that has proven to be a disaster. It affects all departments. It is the biggest infrastructure investment program ever (with projects worth 27bn which will cost 100bn including associated services). When the Blair government came to power in 1997, PFI was not working. While government could have paid for its investments, it chose the PFI route. This was a major challenge to unions. There are many problems with PFI (a) it does not involve new money - as the private sector borrows and government pays for services (b) PFI costs are higher and even though analysis shows that these arrangements represent 'value for money' government finds it can't afford them. Costs are higher because of (i) higher set up costs (consultancy fees); (ii) higher financing costs (2.5-4% more for capital) (iii) higher construction and operating costs were found in a small set of case studies (iv) returns to consortia up to 20% pa. Capital charges for hospitals have been found to increase markedly after introduction of PFI - creating crises from which some have had to be bailed out and others closed.  Because government can no longer afford to provide adequate facilities it lowers standards (eg poor quality, smaller, dysfunctional buildings, 31% fewer beds in hospitals, no design innovation) and accepts a two-tier workforce (where all savings seem to come from lowering pay and conditions). There is some evidence that private sector performance is poor. Profits can be very high. Refinancing after deals are in place produces savings that are not passed on. Government bears all risks. There is no innovation, and vested interests have gained strong positions.  Risks are always found to be just high enough to justify PFI project. Most PFI computer schemes have failed. Big four accounting firms were policy architects and then install it in government. In many cases government advisors were linked to bidders. Schemes are shrouded in secrecy. Contracts are locked in for 25 years - with little flexibility if policy changes (and further large fees to advisers). Unison has campaigned against PFI (unsuccessfully as at present all deals are done this way) and also sought best deals for members. As PFI is driven by public finance needs and off balance sheet accounting, remedies lie in review of PFI; changing borrowing rules (so that PFI is not the only game in town); and level playing field for procurement (by giving public authorities a real choice; and requiring fair wages) [UK situation]

Forum Discussions included:


CPDS COMMENTS ON FORUM

General

This Forum reflected an advance for Queensland because:

However building on this advance will not prove simple because:

Revenue and Economic Strategy - a Necessary Additional Step

The economic dimension of the revenue / spending question is critical because:


Detailed Comments

Smart State

While the 'Smart State' label implies a constructive change in Queensland's media image in relation to economic development and public goods and services, the associated programs intended to enhance Queensland's economic strategy have been purely for show, and are not likely to be economically substantial (eg see Queensland's Lack of Serious Public Policy: A Comment on Smart State). The latter argues, in essence, that there is little to be gained by increasing 'smart' inputs (such as research and education) to an economic system so long as that system lacks the ability to make productive use of them.

Vertical Fiscal Imbalance

Unbalanced federal financial relationships (whereby the federal government raises most funds and the states have most spending responsibilities) have had a significant adverse effect on public spending - see Federal - state fiscal imbalance.

Effective Governance

Governments' ability to respond to the demands of Australia's citizenry and also to help them cope with external economic changes have been declining as governments have been pressured to become smaller. However size of government is not the major factor, as:

Moreover, as noted below, the assumption that coping with economic challenges primarily required smaller government (rather than changes to the economy) was neither necessary nor constructive.

Neo-liberal Economics

A suggestion that neo-liberal economics has proven inadequate in Australia (and what the problem might be) is available in Economic Liberalism in Australia. Moreover:

Public Capital Spending

The relatively low apparent level of public capital spending in Australia in the 1990s by OECD standards may have been partly due to the fact that the big increases in Commonwealth Special Purpose Funding increases by the Whitlam Government in the 1970s virtually deprived all levels of government of the ability to take responsibility for those functions.

The states could not take responsibility because they lacked the financial resources, and managements had to concentrate more on meeting federal financial conditions than on the what actually needed to be done. The Commonwealth Government could not do so, as it gained few political rewards from such spending and had little operational involvement or knowledge.

The suggestion that increasing (productive) public capital formation would ease various economic symptoms by constructively stimulating stronger industry clusters is interesting  (though hard to assess). The multiplier effects of such spending would make a contribution to recouping its costs from taxation (in addition to whatever could be recovered by user pays). However to some extent such spending would need to be financed at the expense of:

The mechanism whereby higher public capital formation might lead to reduced unemployment and greater equity needs more clarity.  Some have suggested mechanisms involving the spill-over effects of knowledge gained through responding to challenging investment demands (as part of 'new' growth theories). Also creating a lower 'hurdle' for industry start-up might be a factor - though whether this would be a long-term advantage is uncertain.

Market economy?

Any claim that evidence does not support the view that a flexible, market oriented economy does not produce good economic outcomes needs to be supported by a citation of that evidence.

Size of Government?

Why is it assumed that a flexible, market oriented economy and a significant role for government can not be achieved simultaneously. Surely this is as silly as the view that a more effective economy required 'small government'.  

Why has it ever been assumed that a better economy mainly required shrinking (or enlarging) government rather than changing the capabilities and mechanisms of the economy itself - which as far as government is concerned depends more on its (low cost) role and effectiveness in 'governing' than on the quantity of (relatively-costly) goods and services it provides.

Increased spending

An increase in spending (eg to national levels) is not in itself proof of effective government, because the quality of spending is much more important than the quantity. And there are signs of problems in this respect (eg see The Growing Case for a Professional Public Service; and Section 5 and Section 6 of Queensland's Challenge; and its Continuation).

Moreover:

Accrual accounting

An accrual accounting system (which clearly distinguishes assets from revenues) improves the picture that one has of public finance overall. However implementing this is not straight forward because:

Grants Commission

The horizontal equalization process undertaken by the Commonwealth Grants Commission has the effect of discouraging states from becoming serious about developing productive modern economies (see Comment on Review of Grants Commission Arrangements).

Financial status

Queensland's existing financial status could be more complex than indicated, noting About Queensland's Budgets.

Public Private Partnerships

See detailed description of for-and-against arguments in About Public Private Partnerships. In brief this suggests that:

Public Sector Comparator

The assumption that private sector costs are likely to be (say) 20% below those of the public sector is invalid - as it involves comparing 'apples' with 'oranges' because the types of functions that the public and private sectors are designed to deal with are qualitatively different and their governance structures have different goals.

The primary goal of a private firm is to maximize profits. This is achieved by minimizing costs and maximizing prices subject to competition. However, according to advice from the Australian Productivity Commission some years ago, productivity is not primarily associated with 'efficiency' (ie with low costs) but with being market focused - ie with doing things that their customers will pay most for.

The primary goal of the public sector is to support governments in 'governing' - ie in the creation of a framework for the community's economic and social transactions. A secondary goal involves the provision of 'public' goods and services.

The latter tend to be those that are subject to market failures because (a) it is hard to identify individual 'customers' (b) positive or negative externalities are significant or (c) investments may be 'lumpy' or unique. Such goods and services tend to be complex and not conveniently dealt with as separable items.

Moreover unlike the situation in private firms (where all attention is focused on what paying customers want), the public sector is subject to governance by a political process where meeting the needs of customers who use its goods and services is only ever one of several imperatives. The primary political imperative is to meet the demands of interest groups who want something other than market outcomes.

Because competition was seen to be impractical, the traditional practice for public goods and services was to aim for low production cost - and to sell (more or less) at cost. The measure of effectiveness was efficiency (ie a high output / cost ratio). This was quite different to productivity (ie a high sales-less-cost / investor-capital ratio) which was the accounting measure of private sector effectiveness.

When a public sector entity is subjected to real competition, this does not overcome the complex array of divergent goals that it must try to party achieve (eg support for 'governing'; meeting interest group as well as customers' demands). Even if it is formally operated on a 'commercial' basis, it will be subjected to informal pressures (eg associated with Board appointments), and it will thus almost inevitably face higher costs and less affluent / committed customers - and so lose money if subject to competition.

Moreover, when a private sector entity provides 'public' goods or services, this does not eliminate their complexity or relationship with interest group goals, so heroic efforts have to be made (at considerable cost) to define them in a simple enough way to be suitable for 'business-like' methods.

Finally the biggest difficulty associated with trying to take a 'business-like' approach to providing public goods and services is that government can lose its ability to be 'government-like'. Governing involves creating framework for community economic and social transactions, and this requires primarily a depth of knowledge, experience and wisdom about such matters - that has little to do with, and thus is not developed by, 'business-like' service delivery.

Anyone who claims to be able to define a meaningful Public Sector Comparator in these circumstances is perpetrating a fraud.   

It appears that such Comparators tend to allow for differences in the cost of capital between the public and private sectors. Governments can borrow at lower rates (eg 2% lower than a strong company) because it is perceived that they are a lower risk. Thus for competitive neutrality Comparators tend to add such a notional margin to the cost of public sector bids. It is economically reasonable to do so, because when public agencies operate in a competitive environment they are in fact subject to the same sort of market risks as a private firm (eg a competitor with lower costs might capture their market and prevent them repaying funds - if it were not for their being underwritten by the taxpayer).

However this begs the question of whether producing public goods and services (ie those that are subject to market failures) in a pseudo competitive market environment is likely to result in significant economic gains. It is the author's contention that such economic gains are likely to be small (or negative) and not really worth pursuing relative to gains that might be achieved through private-public partnerships to provide leadership in the development of industry clusters.

This is not to say that pseudo-market arrangements might not be used constructively for public functions under some circumstances (eg to encourage efficiency) but this should not be seen as involving competitive neutrality between the public and private sectors.

UK Situation

The analysis of the situation in the UK from UNISON raises severe concerns about the state of public services in the UK - and the consequent likely decay of the body politic.  It seems reasonable to conclude that public administration in the UK is heading towards the complexity and accountability problems associated with widespread private provision of public services that required reform in the 1850s when the Northcote Trevelyan report laid the foundation for a professional UK civil service

However UNISON's analysis has looked only at the problems with PFI, not at what the problem was that PFI was supposed to be a solution. To be convincing it would be necessary to look at PFI in terms of the logic that its advocates endorse, and show how this leads to the symptoms discussed. UNISON's presentation did not show that the mess in the UK is due to PFI. Severe financial shortfalls (perhaps primarily an economic problem) or inept public sector management could be to blame.

An analysis of The Decay of Australian Public Administration presents indicators and an account of the decay of the body politic in Australia that has been the result of seriously misguided efforts to 'reform' the public sector - of which efforts to make public service delivery 'business-like' has been a part, but only a part.