The Productivity Commission (hereafter the Commission) has recently released a very substantial and potentially important report, Shifting the Dial, and associated supporting papers. It was produced in response to a reference from the Treasurer for the Commission to investigate the state of productivity improvement and ways that government can enhance productivity performance. This is to be a five yearly review. The report is a most welcome contribution to public sector reform with major potential benefits to the community and represents a strategic and fundamental approach to public sector reform.
The fundamentally important reforms identified by the Commission expose the profound shallowness of the Government’s and Business Council of Australia’s “number one economic reform”, reducing the corporate tax rate from 30% to 25% at a cost of $50billion plus. This “reform” will have only a direct financial benefit for foreign owners of Australian companies” and will have a negative financial impact on Australian shareholders. Even by applying the most favourable and least realistic economic modelling assumptions to boost investment and wages, the result is still only a minor positive impact on GDP after 20 years. This is in sharp contrast to the rich array of reforms identified by the Commission which both boost the economy and the quality of life of Australians.
As a summary the report avoids the tired and ineffective approaches to reform of deregulation, privatisation and tax cuts and focuses on fundamental reforms in five areas as listed below:
- Health sector reform
- Education and training reform
- Achieving functional towns and cities
- Improving the efficiency of markets, covering fixing the energy mess, encouraging innovation and regulatory reform
- More effective government
In this paper I focus on the health sector reforms. The report provides a realistic assessment of the strengths and weaknesses of the health system and sets out a sound program of reforms directed at improving health outcomes as well as the efficiency and effectiveness of the health sector. Summing up the economic and social benefits of the reforms the Commission estimates that their implementation as a package would generate annual benefits equivalent to $38billio by year 20. My additional suggestions for reform are to seek to address the misalignment between the States and Territories on the one hand and the Commonwealth on the other and to add as reform themes accountability for improved health outcomes and prevention of chronic conditions.
Setting the scene, the Commission finds that Australia’s labour productivity (the level of output per employed worker) has, broadly returned to the average level of the last 40 years, which has been in the range of 2% to 2.5%pa. In the earlier period from 2003-04 to 2007-08 it had declined to 1.6%pa. That is the good news. The bad news is that all the labour productivity has been driven by increased investment and none by improved efficiency in using inputs and technological change. In the past labour productivity has been driven about two thirds by capital investment and one third by what is termed multi factor productivity which is improved efficiency in the use of all inputs and technological change. What is different over the last 15 years is that multi factor productivity has been largely absent. Globally in developed economies labour productivity has been lower in the decade to 2017 than in any decade since 1950.
The objectives the Commission has set itself are to simulate multi factor productivity improvement and to enhance the quality of life and productivity of Australians.
I suspect the report and the approach taken by the Commission is a real surprise to the Treasurer who, I believe, will not know what to do with it. The normal focus of reviews of productivity change is to examine matters such as trade policy, competition policy, the labour market, the tax system, privatisation and deregulation.
The selection of the first three areas of focus in the report, health sector, training and education and towns and cities, is in part due to the scale of these areas and the level of potential improvements, but the Commission also identifies some more human scale reasons for considering these areas, including that the benefits of improved performance accrue to all or most people and that the proper functioning of these areas is intrinsically important for the quality of life of Australians. The Commission is also alive to the socioeconomic dimension of these areas, noting that greater than 15% of those in the lowest income households (the bottom 20% by income) have three or more chronic illnesses compared to about 6% in the top 40% by income households.
The report notes that the Australian health sector is rated well globally in terms of life expectancy, having the third highest life expectancy amongst OECD countries and highly rated in overall health outcomes relative to health sector costs. However, there are areas of poorer performance. In common with all developed countries and most developing countries Australia is experiencing a high incidence of chronic non- communicable conditions (hereafter chronic conditions or diseases) such as lung cancer, mental illness, diabetes and cardiovascular disease which account globally and in Australia for 70% plus of health costs. These conditions are to a significant extent preventable and are affected by risky behaviours such as poor diet, low physical activity, excess alcohol consumption, smoking and obesity.
While Australians have high life expectancy, they spend the longest time of residents of OECD countries in ill health, 10.9 years on average. Certain lifestyle risk factors are relatively high in Australia such as 27.7% of the adult population being obese, 23% having high blood pressure, 65.9% undertaking no or low physical activity and 94.9% having inadequate consumption of fruit and vegetables relative to nutrition standards.
There are also significant deficiencies in the health system, including:
- Limited focus on the patient’s needs and experience of care
- Limited and uncoordinated approach to prevention of chronic diseases
- Fragmented and poorly coordinated health system with poor coordination between primary(outside hospital medical and health care) and secondary (hospital) care
- Inadequate approach to capturing and using information that moves with the patient
The fragmented approach to health care and prevention reflects to a significant extent the separation of funding and roles and responsibilities between the Commonwealth on the one hand and the States and Territories. The former funds and oversights primary care, provides tax expenditure funding for private hospitals, is the major funder of health research and contributes funding to secondary health care while the States and Territories are the major funder and owner of public hospitals, provide public health services and contribute funding to health and medical research. Preventative health tends to be addressed mainly at the State and Territory level through Departments of Health running state wide and community based programs with limited involvement of the primary sector. The report cites the statistic that only about 20% of obese people seeing a GP at least once in the last year receive any advice on improving diet, a critical part of prevention of obesity. The separation of roles and responsibilities and funding between levels of government discourages coordination across the whole health sector, provides an inadequate level of focus on chronic disease prevention and encourages non-productive cost shift activities between levels of government.
The report identifies five key areas or themes where reform is essential and would deliver major benefits to individuals, the community and the economy. I will address these five themes in Part 2 of this article.
Michael Lambert is a former Secretary of NSW Treasury and a director and senior adviser on health economics at the Sax Institute, a not for profit organisation that seeks to connect health research with health policy and programs to enhance population health.