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Attachment D: An Economic Solution is Needed, which 'Outputs' can not Provide
1. Fiscal Pressure on Government Needs an Economic Solution
The reform initiatives which are being undertaken in a search for better 'value for money' in government administration have an economic origin.
History: Fiscal pressure on public finances increased widely during the 1970s when public spending in many OECD countries continued to grow at the same rate as previously, and became out of balance with economic (and thus tax base) growth because the latter slowed dramatically (in the face of energy price increases, resulting economic shocks and inflation, and greater competition from Newly Industrialised Countries which eroded the position of mass production manufacturing - til then a major source of productivity in such countries).
Australia's current need to increase national savings (which is seen to require cuts to national spending - especially government spending) is more a consequence of a deficiency in earnings (productive capability of the economy) and thus a limited tax base, than of excessive public spending - noting that such public spending is relatively low by OCED standards.
Nationally, rapid increases in spending occurred in Australia - eg as a result of the One Nation policy in the early 1990s which sought to reduce unemployment by stimulating growth. However productivity and competitiveness growth did not increase sufficiently to prevent a current account deficit emerging. And Commonwealth budget deficits increased - as the tax base did not increase fast enough to recoup spending. Both deficits then limited national spending (especially by the Commonwealth).
Queensland now faces a deteriorating fiscal outlook due to the need for increased spending resulting from population increase, its narrow tax base, and the need for Commonwealth savings - noting that Commonwealth grants had, until recently, been a major source of Queensland's revenue growth.
If governments' financing problems are the consequence of weakness in economic capability (rather than the cause), then just accepting those constraints (by emphasizing 'value for money' in service delivery) will not be enough.
For example, there are limits to improving economic performance by the use of 'business-like' methods in governments - because the nature of Australia's democratic political process is that it is designed to be responsive to interest groups - rather than to customers.
Limited Contributions to Productivity: The productivity of an activity depends on its technical efficiency, on its quality (doing what customers want), and on its focus and flexibility (ie keeping up with customers' changing wants - and doing only what they want). The focus on interest groups (which a democratic politics requires) inhibits government enterprises in focusing on customers - and thus inhibits them in gaining the (say) 80% of potential productivity which comes from customer orientation. Thus such entities are likely to encounter difficulties in any truly competitive environment - as has been the traditional experience of nationalised industries.
Furthermore attempts to commercialize government involve constraining political (ie interest group) influence in order to allow a customer focus. This cuts across the purpose for which many functions were originally established by government (ie government responds to interest groups through politics precisely to ensure that outcomes are different to those of a 'free market' where customers are sovereign). Such attempts at commercialization are thus potentially unstable - because the reduction of political influence (and thus the reduced orientation to the (say) social goals of interest groups) can create political problems (eg as apparently occurred in UK, New Zealand).
2. Government 'Outputs' Can Not Achieve The Necessary Economic Solution
The problem may have to be addressed primarily through effective development of the economy to raise its productivity - and so increase the scope for funding public services.
Economic development means increasing the ability of business and the community to initiate and support high value added enterprises and industries. Such development, which involves qualitative changes in the economy and so affects the nature of growth, is different to economic growth (a quantitative increase in activities within the existing capabilities of the economy). Economic development is required to: improve productivity and competitiveness; increase incomes; make rapid growth more sustainable without limitation by current account deficits; and provide a deeper tax base.
Systematic development of the economy can help because any firm's ability to compete depends on the effectiveness of the economic system as a whole, which it is beyond individual entities to do much about.
'An economic rationalist would tend to say: 'Lets have a market', and leave it at that. But it is a lot more complex as they discovered in Russia .... you need to evolve a whole set of institutional structures. In the Soviet Union they missed 100 years of evolution of institutional structures. As a result ...(they) did not have a body of case law on patents and needed to train a generation of accountants who could perform such tasks as independent evaluation of companies ... Ball argues that there is no sense in deregulating the economy and then trying to plan the institutional structures. It has to evolve ... and it takes time for that to happen ... the institutional framework he has in mind covers everything from families and the values they inculcate to the legal, political, educational, industrial relations and welfare systems.' (Stekete M. 'The Prophetic Professor', Australian, 22/7/96, quoting Professor Ray Ball)
Comparable institutional weaknesses which would need to be overcome in developing Queensland's economy would (for example) include: the absence of capability for sophisticated strategies in business; financial institutions which are oriented towards real estate rather than business; limited access to market intelligence; and limited effective business support for innovation.
Improved productivity (say through economic development) is vital to overcome the current account constraint on growth, because this can significantly change the ratio between national income and expenditure - while economic growth without significant productivity growth will tend to increase both (and thus make much less difference to the gap which requires foreign capital inflows).
Thus a successful State Economic Development Strategy is required to overcome the economic cause of the funding constraint.
But, while service delivery (including infrastructure) contributes to economic growth, it can not (normally) contribute much to the development of the productive capabilities of the economy. In fact some services delivery (eg government assistance to firms) can be the opposite of development of the economy (ie of developing the ability of different sectors to provide needed assistance to one another within a competitive market framework).
Consider (say) applied R&D which is an important indicator of whether an innovation capability exists in firms or the economy - innovation being a key component of long term productivity growth. In most sectors, there is no market failure requiring public funding of applied R&D - and great potential to distort business goals through such funding. Economic development requires government to create community understanding of the value of innovation, and capable institutions (eg for R&D) without direct government involvement. A leadership / catalytic process is needed to produce such outcomes, not government outputs or services.
Thus dealing with the cause of the funding constraint mainly requires a leadership / stimulation process which achieves qualitative outcomes in terms of new systemic characteristics in the economy itself (eg new institutions, skills). Such outcomes might typically: