MICHAEL KEATING. The Productivity Commission on more effective government. Part 1 of 2.

This article, the first of two which discuss the Productivity Commission’s recommendations for more effective government, focuses on how to improve Commonwealth-State relations, and fiscal disciplines and accountability. The conclusion is that the Commission’s recommendations are for the most part disappointing. They fail to take account of the practical difficulties in better matching taxable capacity with expenditure responsibilities, and the extent to which governments are already held to account for achieving budget targets. 

Like other commentators, I welcome the change in the reform agenda on how best to improve long-term productivity growth that has been proposed by the Productivity Commission in its latest review, Shifting the Dial. The Commission has recognised that the previous reform agenda, mainly focussed on improving the operation of markets, has now largely run its course. Instead the Commission argues, convincingly, that the agenda now needs to shift its focus to services, where “the greatest prospective gains now lie, … [and] especially those that all of us consume regularly”.

The Commission identifies five priority areas for reform; in each of which governments are heavily involved:

  1. Health
  2. Education and training
  3. Cities
  4. Market efficiency, covering energy, and encouraging innovation and regulatory reform
  5. More effective government.

In this post I will focus on the last: more effective government, although these five reform areas are meant to be pursued as a package.

Unfortunately, I found this section of the Productivity Commission Report, on more effective government, somewhat disappointing. Indeed, I had a strong sense of deja vue regarding the problems, and disappointment regarding the solutions, or often, the lack of solutions.

The Commission’s starting point is what it alleges to be a loss of trust and confidence in government – but there was plenty of literature making the same allegation in the hey-day of reforms through the Council of Australian Governments (COAG) in the early 1990s. Sure, governments (around the world) are finding it more difficult to meet public expectations than in the 1950s, but perhaps that is because those expectations have risen considerably and governments have also increased the range of their responsibilities, taking on increasingly more difficult tasks, involving the resolution of more ‘wicked’ problems. In addition, the literature argues that as our society has become more educated and individualistic, it has become more critical and respect for authority (including governments) has therefore declined.

Commonwealth-State Relationships

As the Commission recognises, most of its proposed reforms of public services will require the States and the Commonwealth governments to work cooperatively together. To this end I would support the Commission’s first recommendation that COAG should “Seek a Commonwealth-State/Territory Agreement to a formal Joint Reform Agenda”.  This could act as a useful catalyst and provide direction. But for COAG itself to succeed, it will also need to confine its agenda to major issues across portfolios and stop intruding into areas that are better left to line Ministers and their departments.

Where I am more sceptical are the Commission’s recommendations that:

  • Improved revenue sharing arrangements are an essential element of a joint reform agenda
  • There should be agreement on “a practical division of responsibilities that is focussed on the nature of the policy problem at hand and the parties most willing to design effective change”.

In my experience, nothing will come out of either of these recommendations, which have had considerable consideration over many years. This lack of success in progressing such changes is not because of any recalcitrance. Rather it reflects their impracticability when more closely considered.

For example, a significant change in revenue sharing, so that the States raised much more of the revenue to match their responsibilities, could really only be achieved by:

  1. Allowing the States to raise their own income tax. This proposal has always been rejected by the States in the past, and two levels of government sharing a tax-base would probably pose even more problems than sharing some expenditure responsibilities.
  2. Increasing the GST, which is effectively a State tax as the States receive all the revenue. But this would also require the Commonwealth to reduce its specific purpose payments to the States, which it and the Australian people may well resist. In addition, it is quite likely that if the Commonwealth is to achieve a sustained Budget surplus in the longer-term it will have to access an increased GST, unless it is prepared to increase the collection of income tax revenue (see also my article on “Income tax cuts – what can we expect? Part 2” posted on 5 December 2017).

Furthermore, the Productivity Commission itself admits that it “is highly improbable that VFI could be eliminated completely”; citing an estimate that this would require a 90 per cent increase in the State’s own taxes and charges. But what would be achieved in terms of responsibility and accountability if a significant level of VFI still continued? In that case the ‘blame game’ could continue, with each level of government blaming the other for any perceived inadequacy of funding.

Similarly, the present array of shared responsibilities appear to be widely supported by the Australian people, so that significant changes are unlikely. Instead reform efforts have started by accepting that there will continue to be shared responsibilities, but there may be scope to better define each level of government’s respective roles, which ideally should not be shared. This was the purpose of the 2008 reforms led by the Rudd Government which resulted in national agreements that sought to guide the delivery of services in health, education, skills and workforce development, disability services, affordable housing and indigenous reform. These agreements were intended to clarify the roles and responsibilities of governments, and defined the objectives, outcomes and performance indicators for each service area. The Productivity Commission considers that “These arrangements have provided greater clarity of roles and responsibilities, but have not fundamentally altered intergovernmental dynamics”. But that judgement begs the question of whether there is an institutional reform that would improve “intergovernmental dynamics”? The Commission does not explore this question, but in my opinion further improvements in Commonwealth-State relations will depend on more agreement on what are the problems and their solutions, and achieving such agreement will depend much more on the personal relations of the key participants than on any possible institutional changes. For example, the heyday of COAG-driven reforms was the early 1990s, and COAG worked well then because of the good personal relations among the key participants and because they shared the same broad end-goals, and these reforms were not much influenced by the institutional structures.

Improved Fiscal Disciplines and Accountability

Another recommendation by the Productivity Commission for more effective government is to improve fiscal disciplines and accountability. The Commission acknowledges that the rules incorporated into the 1998 Charter of Budget Honesty have improved Commonwealth Budget transparency and thereby, accountability. Furthermore, governments do already set fiscal targets, and they are held to account for their achievement by the Parliament, the media and those members of the public who actually care. However, the Commission seems to think that more can be achieved by:

  • making the targets more specific (in some unspecified way),
  • getting the Parliamentary Budget Office (PBO) to report annually on the ability of budgets to meet their targets
  • requiring governments to make longer-term projections of selected major programs
  • requiring all governments to contribute to the development of a whole-of-nation intergenerational report (IGR) which would allow consideration of the long-term outlook for all public expenditures and revenue
  • shifting responsibility for the Commonwealth’s own IGR from the Treasury to the PBO.

In principle, these recommendations seem useful, but how much difference they would make is more of a moot point, especially given that much of the essence of these recommendations exists already. In addition, some recommendations would require a lot more work: the national IGR, the reliability of the longer-term projections for specific programs, and more specific targets might all cause problems. And while the impartiality of the last 2015 IGR has been properly criticised, that was not true of its predecessors and maybe it would be better to restore the integrity of the Treasury than change functional responsibilities. In particular, the recommendation for the PBO to report on the government’s fiscal plans would create a much more adversarial role for the PBO. The PBO would then be commenting on government policy whereas Auditor-Generals are for the most part confined to reporting on departmental administration.

Conclusion

In sum, I don’t think the Productivity Commission’s recommendations to improve Commonwealth-State relations and fiscal disciplines will make much difference to the effectiveness of government. This is partly because many recommendations do not represent much change. But it is also because, as I see it, many of the problems of effective government in Australia at present relate to the administrative culture. Changing this culture may depend more on the quality of the leadership, including ministers, and will not be much changed by changing the management systems.

In Part 2 of this series I will explore this theme further by looking at the Productivity Commission’s other recommendations for more effective government, which focus on the public service, and particularly on the Australian Public Service.

Michael Keating is a former head of the Australian Public Service and chaired the Officials Group that was responsible for preparing the first and subsequent meetings of COAG up to June 1996; a period when it is generally agreed that COAG was most successful in pursuing reforms.

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One Response to MICHAEL KEATING. The Productivity Commission on more effective government. Part 1 of 2.

  1. Colin Cook says:

    “……….so that the States raised much more of the revenue to match their responsibilities, could really only be achieved by:

    Allowing the States to raise their own income tax. This proposal has always been rejected by the States in the past, and two levels of government sharing a tax-base would probably pose even more problems than sharing some expenditure responsibilities.
    Increasing the GST,……….”
    A ten year plan of ‘encouragement’ by the Federal Government to make the States raise significant revenue through a nation-wide, flat rate Land Value Tax would help solve a lot of problems as well as raising revenue.
    Why is LVT not on the table? Could it be that the top-end-of-town would be forced into paying their share of community costs?

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