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Shifting the Dial: 5 year productivity review

Chapter 6: More effective governments

Benefit assessment:Invaluable; primarily a lift of confidence
in capacity to govern ourselves
More Effective Governments: What matters?

Problems

Solutions

Benefits

Intergovernmental relations and national reform

  • Without national agreement on reforms to shift the dial on productivity, income growth will languish
  • COAG, the apex of intergovernmental relations, is currently not an effective reform vehicle
  • Imbalance in Commonwealth-State funding power lowers confidence in Commonwealth-State cooperation
  • Over-reliance on financial payments to incentivise reform
  • Governments agree to develop a Joint Reform Agenda. Agenda to be negotiated within a year (2018)
  • Renew collective commitment at COAG, as part of the reform agenda
  • Commit to tax changes that would improve revenue-sharing arrangements as an essential part of the Agenda
  • Independent monitoring of progress and impacts
  • Practical division of responsibilities based on the nature of the policy problem at hand and the parties most willing to design effective change
  • Maximise prospects for lifting productivity and, from it, national income and welfare
  • Reduce inefficiency, ability to cope with digital and other shocks to our economy
  • Improve tax accountability

Management of public finances

  • Tax system costing the community more, raising relatively less
  • Weak budget constraints, especially at the Commonwealth level
  • Insufficient cross-government understanding of long-term national spending pressures
  • Start tax reform with government revenue-sharing arrangements
  • Strengthen accountability mechanisms:
    • more precise fiscal targets (Cth)
    • longer-term projections for major programs
    • new tasks for PBO
  • A ‘whole of nation’ intergenerational report
  • Circuit breaker
  • Tax system better supports growth and capacity to provide services
  • Higher credibility
  • Ability to provision for shocks

Capabilities of governments

  • Poor adherence to policy due diligence requirements
  • Skills of staff, including on policy development and risk management, not supported
  • Limited accountability for already accepted public sector reform initiatives
  • No policy areas should be immune from proper appraisal
  • Require evaluations, link continuation of program funding to rectification of problems
  • Public service commissions formally evaluate progress against current skills; advise improvements
  • Secretary-level charter on skills
  • Stronger policy development and delivery capabilities
  • Defund poor quality programs
  • Renew ability to judge risk well
  • Reduced likelihood of mistakes

Local government

  • Transparency on Local Government performance
  • States and Territories draw on the experience of Victoria and require better performance reporting by Local Governments
  • Improved accountability to residents and taxpayers
  • Provide an incentive for Local Governments to improve their performance

6.1 Introduction

The concept of ‘effective government’ might seem for many people to be a tedious subject.

The Productivity Commission begs to differ.

Without a renewal of commitment from time to time amongst the institutions that set societal objectives, preserve standards and make public services effective, there is little prospect of advancement in the living standards of Australians.

Moreover, the effectiveness of government functioning is critical for continuously improving living standards. Governments set and re-set the legal and commercial rules of the game that give greater certainty to investors, and standards to protect employees and consumers. Governments choose our service levels — in defence and trade, as well as the more obvious health and education — and they set incentives and provide information for the development of natural resources, and rules to protect the environment. They fund infrastructure, and collect and reallocate tax revenue to reduce inequities in opportunity and outcomes.

Above all, they manage the complex interaction of all these, across three levels of government, a task that often only comes to notice when it fails badly. It is this area that is of most concern in this chapter of the Report.

The effectiveness of governments, in terms of what they do and how well they do it, are ultimately judged through election processes. But elections are years apart and can only focus on select topics. Inevitably, there must be substantial reliance by the community on commitment within the terms of governments and the nature of leaders themselves to care about sound processes and relevant capabilities; and external checks and balances to back them up or call them out when they are lapsing.

6.2 How are governments performing?

International comparisons using common measures of what might be considered the basics of good governance suggest Australian governments perform relatively well (figure 6.1). Australia is seen as stable politically, with good legal process and reasonable accountability. This has been a major factor in our past economic performance and the achievement of income growth across all households (chapter 1).

Being amongst the best in a backward-looking sense will not necessarily offer us any guide for how to handle future challenges. Our primary mechanisms for coordinating and delivering reform across the three levels of government have not been renewed in a decade (although the subject matter and forms of agreement have shifted often). Lifting prospects for future growth in national income and living standards will require concerted, and in many areas, joint, action by governments. A renewal of commitment would lift confidence in this not being another agenda item amongst a long list, and contribute to an understanding of the priority for such change.

Confidence is low between governments in Australia — reflected, for example, in the reaction to a new competition policy reform agenda at COAG in December 2016, or disputes over energy supply. We may comfort ourselves that there are cycles in these things, or that it was ever thus, but neither judgment would suggest anything like a recognition of the slowing capacity for future growth that this report outlines.

Confidence is low between, and in, governments

Figure 6.1 Australian governments fare well by OECD standardsa

  • Measures of government performance, OECD countries, 2015

    This figure is divided into four panels. Each panel provides a comparison of OECD countries in terms of select measures of government performance. The measures are regulatory quality (panel 1), voice and accountability (panel 2), political stability (panel 3) and rule of law (panel 4). Australia performs well by OECD standards for each measure.

    a Measures are from results for all countries, with data extracted for OECD countries. Values on the vertical axis are standardised deviations from the global mean.

    Source: World Bank, World Governance Indicators Database (2015).

There is no sense of a national challenge needing collective effort towards solutions. And collective effort is core to lifting national productivity, as has been demonstrated in previous chapters. States and Territories are crucial partners if national reforms are to be effective.

Confidence in governments is also low. Surveys suggest that Australians’ trust in public institutions is at historic lows (box 6.1). Perhaps things are not that extreme, but it is best to recognise that we — this Commission, too, is part of the institutional fabric — are not travelling well. While the reasons for this are complicated, feelings of economic insecurity and lack of opportunity associated with slowing economic growth and a stalling in real income must be relevant. Reversing this must be part of the solution. There have similarly been falls in trust in many governments around the world coinciding with the protracted period of stagnation since the global financial crisis.

Trust in governments is a practical precondition for effective policy-making. Trust signals confidence that governments will competently fulfil their mandates and generally act, in accordance with understood values, in the interests of most citizens. Trust contributes to stable administration, but it is also necessary for responding to change — to gain support for new policy directions, and to trigger the desired behavioural responses from firms, employees and the public.

Box 6.1 Trust in governments has fallen

  • There are multiple, somewhat inconsistent measures of trust and confidence in governments from surveys, an inevitable outcome given the subjective nature of the concepts:

    • Cameron and McAllister found that the share of Australians who agreed that ‘people in government can be trusted’ was down to 26 per cent, the lowest result since the survey began in 1969; the previous lowest result was 30 per cent in 1979.
    • The Gallup World Poll found that trust in governments decreased by an average of 2 percentage points between 2007 and 2015. The decrease was sharper in Australia, albeit not substantially.
    • The 2017 Edelman Trust Barometer found that Australians’ trust in governments dropped 8 points to 37 per cent from 45 per cent in 2016.

    Despite the variations, some common themes emerge. First, in recent years, the majority of Australians do not have trust or confidence in government. Second, the level of trust has fallen significantly. And third, Australia is not alone, with many countries showing high levels of erosion of confidence in their governments.

    The main concerns cited in global surveys where trust has fallen were shared across countries: poor economic growth, globalisation, the pace of innovation, and associated concerns about job insecurity and income inequality; eroding social values; and unease about the handling of global risks and pressures such as large scale immigration and geopolitical tensions.

    Historically, there is strong evidence of a relationship between economic growth and trust in governments. In short, people tend to trust — or ignore — governments when economic conditions are good. Fears are magnified and governments noticed more when they are not.

    Domestic surveys further suggest perceptions of a lack of integrity (self-interest and unkept promises) and clear guiding values on the part of elected representatives, and disaffection with the adversarial nature of parliaments.

    Sources: Cameron and McAllister (2016); Gallup World Poll (2016); Edelman Trust Barometer (2017); OECD (2017c);Markus (2015); Blind (2006).

6.3 Progressing reform

A new reform agenda

This five yearly productivity review process offers an opportunity to renew a commitment to reforms aimed at lifting living standards over the medium term.

The Minerals Council of Australia (sub. 30) endorses this view:

The current review is an opportunity for the Productivity Commission to help reinvigorate a comprehensive microeconomic reform agenda that promotes productivity gains. (page 2)

A reform agenda should be a set of integrated reforms that form a coherent package. This Report proposes what could form the core of an agenda that is jointly pursued by governments. However, we can and do expect it to be negotiated.

Some reforms will be easy and others hard, but all must be informed by a clear objective to get a particular market or sets of related markets to work efficiently with due consideration for phasing of the impacts of adjustment. Commitment to a package allows for clearer signalling of reforms and sequencing to ensure that foundations are in place to support later changes.

It is plausible to see jurisdictions negotiating
a package of reforms to achieve a commitment to
policy change not seen for the past 15 or more years

The process used in generating this Report has sought to involve State, Territory and Local Governments. Meetings and exchanges have been held at the working level in many of the areas identified as offering the greatest opportunities, and central agencies have also been consulted. Our approach suggests that it is plausible to see a package of reforms being negotiated amongst jurisdictions, and become the subject of the kind of medium-term reform commitment not seen for the past 15 or more years.

Recommendation 6.1 Seek Commonwealth-state/territory agreement to a formal joint reform agenda

HOW TO DO IT

A formal commitment and an institutionally-supported process are both needed to sustain cooperation on reforms of this nature beyond any one term of government.

Recognition should be offered that not all parties are likely to progress all changes at the same rate. But neither should a veto be offered to any one party, once agreement is achieved. A year (2018) should be allowed to strike such an agreement.

The role of monitoring and reporting on an agreed Joint Reform Agenda should be assigned to an independent body, such as a revamped National Competition Council or the Productivity Commission.

The monitoring body should be empowered and resourced to collect information on the progress and outcomes of reforms at Commonwealth and State and Territory levels and to report on a biennial basis.

Local Government should be invited to participate, once an agreement is struck.

An overall assessment of the progress and impact of the reform agenda should be included in the 5 yearly Productivity Reviews to be undertaken by the Productivity Commission.

Doing the fundamentals well

It is one thing to address a restoration of confidence between governments, and another thing to restore it in governments.

Restoring the latter requires clear explanations of why a reform agenda of the kind proposed in this report will be of value to individuals and firms, those upon whose response to proposed reforms rests the achievement of any gains.

That response requires more than just clarity of purpose, although that is unarguably needed. It also requires work to ensure that the ‘basics’ are right — as the public’s support for major reform is unlikely to be sustained if core tasks are not also done well. And beyond this, it requires persistence of view. Frequent switching of targets encourages a lack of belief in any objective and interest in any new idea.

The rest of this chapter focuses on strengthening the ‘must haves’ of sound governance and public sector productivity. We examine a loss of confidence in how national finances are being managed to indicate where its contribution to the overall credibility and efficiency of government could be lifted. We look at public sector capability; and at the damaging burden-shifting rhetoric that accompanies the current tax-sharing arrangements.

Treated as implicit in this paper is political leadership. No amount of commentary or analysis can substitute for a willing recognition by our leaders that we face a disappointing outlook for many Australians if a low growth world persists.

We could hope that forecasts of returning growth paths are right. But the private investment to back that remains noticeably absent. And demographic changes, including an ageing population, are anticipated to result in lower output and income per person over the next decade. Lifting participation will support growth to a small degree. Future episodes of high demand for Australian products may temporarily lift incomes. But achieving productivity-boosting reforms are as ever the most sustainable way of improving living standards.

Individuals and business need clear explanations
of how reform will benefit them

6.4 Public finances

The States and Territories’ reliance on the Commonwealth for revenue (45 per cent of income in 2015-16) and major areas of shared responsibility create serious points of tension between the levels of government (Supporting Paper 14 (SP 14)).

Any improvements in the government sector, a growing part of the economy under pressure from demographic change, technology and public expectations, will require high levels of cooperation.

At this juncture, however, it could not be said that revenue sharing is a source of improving confidence amongst governments — all public comments and much of private advice to this Inquiry suggest the reverse. Accordingly, if this can be addressed, it would offer a substantial fillip to the workability of intergovernmental relations.

How reform of the tax system can lift confidence between governments

Australia’s national tax system is regarded as one of the most complex in the world. Adding to that burden, it is under pressure from (amongst other structural factors) technological advance changing the structure of business activities; highly mobile investment and multinationals’ intra-firm purchasing and lending arrangements; and greater international labour mobility.

Australia’s national tax system,
regarded as one of the most complex in the world,
is costing the community more and raising relatively less

Principles for tax systems are well-recognised and include, among others, sustainability, simplicity, equity and efficiency. The latter is not a static concept, but captures the desirability that a tax system should limit the damage it does to effort, innovation, investment and growth (Pearl 2016). The current system hits few of these targets. Instead, it may limit economic growth, reduce labour supply and do little to address inequity (SP 15).

The scope for government inefficiency and blurred accountability for programs is significant given the heavy reliance by other levels of government on the Commonwealth for funding, with the latter raising 80 per cent of total tax revenue in Australia.

An institutional circuit breaker

Two reviews of tax settings (the 2015 Re:Think process and 2009 Henry Tax Review) have tried to advance broad reform in the past ten years and failed. There is little reason to consider that a further general review is likely to work. While there are several reasons for the failure of these processes, one evident factor is that the sheer comprehensiveness of proposed change is in fact not a positive factor.

Rather, the challenge of adopting either all of a report, or cherry-picking it, can both sow the seeds of its own downfall. A comprehensive reform package is too large to readily contemplate (a government would have to bet its future on it). Yet cherry-picking draws immediate fire, both from the interests who may lose (for example, the mining tax) and from the architects or supporters of comprehensive reform.

The Commission is not proposing a suite of tax reforms as part of this Report. But it is arguing that tax reform must not be considered dead.

A joint commitment to change is required, lest the necessary cooperation between levels of government on matters such as (but not limited to) the reforms in this Report languish due to budget and service quality pressures — particularly on the smaller States and Territories.

This commitment could match the medium-term nature of the reforms in this Report. Inherently, many of the biggest bang for buck commitments in this Report have three to five year implementation horizons. Thus a commitment to revision of tax structures to address revenue-sharing; that is, not a commitment that must necessarily add to the tax burden but one that adopts objectives for tax reform that relieve revenue-sharing pressure points. The objective is clear to the public and its rationale is reasonably self-evident. The case for change can then rest less on comprehensiveness (desirable in principle though that is) and more on relief from structures that have outlived their usefulness.

One source of options for such change is the report on Horizontal Fiscal Equalization that the Commission will produce in draft by October 2017. This review should not be viewed as a cynical effort to side-track tax reform, nor is it merely a chance to fiddle with the formulae for a portion of the grants made to States and Territories.

Tax reform must not be considered dead

Recommendation 6.2 Tax reform as an integral part of the joint reform agenda

To improve confidence between levels of government, and support more efficient provision of public services, governments should adopt a commitment to tax changes that improve revenue-sharing arrangements between governments as an essential element of a Joint Reform Agenda.

There is then every reason for the participants to pursue reform together.

Budget accountability

The Parliamentary Budget Office has observed that the nationwide fiscal position has deteriorated significantly over the past decade, driven largely by the Commonwealth’s fiscal position. Some States are in good health fiscally, yet the focus is continuously on what the Commonwealth can do to buy reform. This is not a well-considered position, viewed in the context of this report.

In recent years, the worsening in the Commonwealth’s fiscal balance has significantly reflected over-optimism embedded into a system that inherently favours a return to past performance after a shock. A consequence has been that at times both revenue and expenditure forecasts have been clearly astray and persistent borrowing has been required. The Commonwealth’s forecast dates for a return to surplus have been revised five times since 2010-11.

The national net debt position has shifted from a negative 6.8 per cent of GDP in 2007-08 to 21.2 per cent est.) in 2016-17, 88 per cent of the latter generated by the Commonwealth.

The Productivity Commission is very conscious of the difficult task involved in forecasting revenue, especially in the wake of the global financial crisis.

Yet the credibility of governments is affected by their ability to budget reliably. And the strength of budget constraints influences government productivity (that is, the design and efficiency of programs), and current and future tax burdens.

The question of public confidence in government getting the basics right posed earlier is relevant here. A key question, given the persistent uncertainty of revenue forecasts (the dependence of the current budget forecast on higher productivity and a return to wage growth well above recent experience is the latest revenue-oriented uncertainty), is whether expenditure can be subject to better mechanisms that heighten the likelihood of targets being met and longer-term pressures being prudently managed.

Experience suggests there are limits to the capacity of rules to influence government spending behaviour (box 6.2). But efforts are required and there are good practical options that may strengthen a key discipline and exemplar of how government is viewed.

Box 6.2 Better rules have improved budget transparency

  • The only mechanism for compulsion on fiscal policy matters at the federal level is the Charter of Budget Honesty Act 1998 . At the time of its introduction, the Charter created a global benchmark for disciplines on policy formulation and reporting, requiring:

    • fiscal strategy to be based on specific principles and in a medium-term framework
    • publication of the fiscal strategy and regular reporting of progress against it, as well as updates on the fiscal and economic outlooks
    • release of an intergenerational report at least once every five years to help ensure policy decisions have regard to their financial effects on future generations
    • the Secretaries of the Departments of Treasury and Finance to release a pre-election fiscal and economic outlook report.

    There was a further major change in fiscal accountability arrangements in 2012 with the creation of the Parliamentary Budget Office, which provides policy costings and independent advice on matters relating to the budget, including the longer-term impacts of major policies.

    These changes have markedly improved reporting on fiscal strategies and performance, and prompted better parliamentary debate on proposed policies — for example, by reducing the advantage government had in relation to policy costings and development, and shifting the focus from the accuracy of costings to the in-principle merit of proposals.

    Most of the points made by Treasurer Costello in his 2nd reading speech for the Charter of Budget Honesty Bill resonate today:

    … The need for improved fiscal outcomes in Australia is clearly demonstrated by the persistence of Commonwealth deficits over the past 25 years, the ratcheting up of Commonwealth general government net debt and falling levels of national saving.
    … Spending money the government does not have is merely racking up debts for future generations and making their lives harder rather than easier ... This bill will rectify this situation by implementing institutional arrangements to improve the formulation and reporting of fiscal policy.

    Sources: ANAO (2014); Watt and Anderson (2017); Costello, 2nd Reading speech, Charter of Budget Honesty Bill 1996 (1996).

Fiscal targets

States and Territories appear generally to be having more success than the Commonwealth with approaches to budget practice (SP 15). The task is often (not always) simpler for States and Territories, but that does not mean no lessons can be learned by the Commonwealth.

A distinction between most States and the Commonwealth is that the former have specific fiscal targets. The types of targets adopted vary from State to State but typically limit growth in expenses or net debt to specific or calculable levels.

The terms of the Australian Government’s current fiscal strategy are less precise than most State Governments’. It seeks as its principal objective the achievement of fiscal surpluses, on average, over the economic cycle, via, among other things, reducing the ratio of payments to GDP and stabilising and then reducing net debt over time. The targets do not, for example, specify timeframes for reaching surplus or reducing debt. And economic cycles themselves are far less apparent in Australia today than when such a target was originally set.

The Commonwealth’s fiscal strategies have relaxed since 2008-09, the first year of the recent period of deficits (figure 6.2), indicating a lowering of expectations. In part, this may pragmatically reflect that unforeseen events have prevented commitments being achieved. But it has also softened any discipline that the strategies may once have imposed on aggregate expenditure.

The Commonwealth can learn from
State & Territory approaches to budget practice

Fiscal targets are not prerequisites for achieving fiscal sustainability and they are, by nature, crude tools. There is no neutral answer to the question of the optimal size of government. But credit ratings affect the cost of debt, and large debt positions increase vulnerability to shocks, so the size of debt — which need not necessarily correlate to the current size of government, of course — cannot be ignored.

There are risks on the upside (over-reaching the target) as well as the downside. Overall, specific targets can be a useful public policy tool to help alert all sides of politics to developing imbalances. And, to the extent that they successfully remain un-breached, to convince the public that the basics are being well-managed.

The Australian Government should undertake to update its fiscal target of balance over the economic cycle, adopting a time-limited fiscal target with regular evaluation and reporting.

The Parliamentary Budget Office could be tasked by the Joint Select Committee on the Parliamentary Budget Office to report annually on the ability of budgets to achieve the target, and at midyear how the progress of measures through the Parliament (or lack thereof) and subsequent discretionary decisions of Government have altered the likelihood of the fiscal target being met.

Better understanding the underlying drivers of budgets

Governments’ budget reporting horizons cover the budget year plus 3 years, yet significant measures increasingly impact beyond the short term. Currently, Commonwealth Budget Papers report projections of underlying cash, net operating balance, net debt and net financial worth to 10 years, but do not include spending and revenue projections either at the aggregate level or for most major programs. These, however, have been periodically produced by the Parliamentary Budget Office, after the delivery of Budgets. States and Territories do not give budget projections beyond the forward estimates period.

A 10 year horizon on the projected impacts of selected major programs would better inform decision-making. This has been recognised for the National Disability Insurance Scheme, one of the few programs on which some additional information is provided in the Commonwealth’s 2017-18 Budget, which is projected to be the largest contributor to expenditure growth over the next ten years.

Figure 6.2 Commonwealth fiscal strategies over time

  • This figure describes how the Australian Government’s fiscal strategy has changed over the period 2007-08 to 2017-18. It also presents data on the budget outcome and net debt as ratios of GDP in each budget year over this period. The figure shows that the fiscal strategy has changed four times over the period and has progressively become more relaxed. Over the period, the budget outcome has moved from a surplus in 2007-08 to a deficit in every other year. Net debt has changed from -3.3 per cent of GDP to an estimated 19.5 per cent of GDP in 2017-18.

    Source: Budget Papers.

Another example is parent visas, which provide a short-term benefit to the budget via visa charge income, but impose very large costs in the longer term through their impacts on expenditure on health and aged care, and social transfers. In previous work, the Commission estimated the budgetary costs associated with the 2015-16 parent visa intake alone to be $2.88 billion in present value terms over the lifetimes of the visa holders. By comparison, the revenue collected from these visa holders was only $345 million. Ten year estimates of the fiscal effects of the current parent visas would show a similarly stark disjuncture between revenue and costs, and would therefore provide the insights for a more informed policy decision on the pricing or desirability of these visa types than the current decision-making framework.

10-year projections for selected major programs
would increase the likelihood of more sustainable policies

In a different area, the value of outstanding income-contingent student loans provided under the Higher Education Loan Program (HELP) scheme is expected to rise significantly over the coming years — from $47.8 billion in June 2016 to nearly $200 billion by 2025. The Government has made policy changes to try to curb this growth, including replacing the VET FEE-HELP scheme and increasing repayment levels (discussed in SP 7). However, the projected effect of these changes on the level of outstanding HELP debts is not published, as the Budget considers HELP debts to be an asset, while the Department of Education and Training only publishes historical data.

Uncertainty about projections rises with the projection period. But that is little reason to neglect the longer-term impacts of policy proposals and settings. Introduction of 10-year projections for major programs and aggregates in fiscal strategy statements would increase the likelihood of more sustainable policies by improving understanding of their underlying drivers.

Putting the ‘intergenerational’ back into Intergenerational Reports

Intergenerational Reports (IGRs) are currently prepared by the Australian and New South Wales Governments. They aim to raise public awareness about the budgetary challenges associated with demographic change — including population ageing — and aid public scrutiny of the conduct of fiscal policy by assessing the long-term (40 year) sustainability of current programs.

There is no whole-of-nation perspective on the sustainability of current policies affected by demographic change. This makes IGRs of limited utility given State and Territory Governments’ reliance on financial transfers from the Commonwealth, and the involvement of both levels of government in major service delivery areas (for example, the Commonwealth meets about 40 per cent of health costs, while the States and Territories meet 23 per cent, and the Commonwealth provides about 40 per cent of total state spending on social security and welfare) (Australian Government 2017, Budget Paper No. 3 p. 7).

A whole-of-nation IGR would be a major undertaking and require active cooperation across governments. But it would provide a more accurate picture of the major drivers of public finances and the impacts of policies in joint service areas affected by demographic change, better enabling the development of policy alternatives.

At present, the impact of decisions made by one level of government on others is not always clear. For example, the Commonwealth’s announcement in the 2014-15 Budget to change the way it contributed to long-term growth in hospital costs would have transferred the impact of rising health expenditure to State and Territory Governments. Ultimately, this decision was reversed, but it showed up in the 2015 IGR as a source of future improvement in the Commonwealth’s position even though it would have worsened the States and Territories’.

A whole-of-nation Intergenerational Report
would provide a more accurate picture of
long-term influences on national finances

There is scope for more substantive treatment of intergenerational impacts in IGRs, such as the effect of current tax settings on favoured asset classes and intergenerational wealth transfers, which are increasingly relevant to the incidence of taxes and the types of policies that might be envisaged (for example, housing equity withdrawal for aged care, or property-based taxes, as mentioned in chapter 4). A national IGR would, again, better reveal the impacts of policies and choices available.

Several parties have suggested shifting responsibility for IGRs at the federal level from Treasury to the Parliamentary Budget Office (SP 15). This would help to ensure that the IGR is a non-partisan report and facilitate a consolidated view of governments’ fiscal sustainability. The PBO’s capacity to undertake such a task would be improved if Parliament accepts the recommendation of a recent review of the PBO’s functions to further develop its ability to analyse underlying budget drivers, including, but not limited to, its analytical capabilities on demographic change (Watt and Anderson 2017).

Recommendation 6.3 Improve fiscal strategy disciplines

Governments should adopt measures that will better inform and improve accountability for spending and fiscal strategy decisions.

HOW TO DO IT
  • The Australian Government should adopt specific fiscal targets to assist budget management and credibility.
  • To strengthen the credibility of targets and the likelihood of them being met, the Joint Select Committee on the Parliamentary Budget Office could ask the Parliamentary Budget Office to report annually on the ability of budgets to achieve targets, and at mid-year on whether and how the progress of measures through the Parliament and discretionary decisions of Government have altered the likelihood of targets being met.
  • All governments should adopt longer-dated projections of selected major programs to better inform the formulation of budgets.
  • All governments should develop a whole-of-nation intergenerational report (IGR).
  • Shifting responsibility for the IGR at the Commonwealth level to the Parliamentary Budget Office would ensure that the IGR is a non-partisan report and help achieve a consolidated view of governments’ fiscal sustainability.

6.5 Capabilities of governments

The quality of what emerges from government depends much on the quality of intangibles — the human and knowledge capital, institutional processes and relationships within and between governments — used to produce its outputs.

These are also key determinants of governments’ own productivity, an increasingly important factor in our productivity performance given the relative growth in services that are procured or delivered by governments.

Government is growing, not reducing, its role in markets, driven by our expectations of improved services; demographics; the appetite for applying new technology; and the persistent rise in security needs.

The non-market sectors, in which governments are the predominant service providers or funders, now represent 20.3 per cent of industry gross value added and 27 per cent of total employment — up from 17.2 per cent and 21 per cent in 1990, respectively (ABS 2016, 2017b). There must inevitably be a drag on national productivity if government productivity is also not under constant pressure to improve.

The following sections consider the mechanics of government: intergovernmental arrangements; policy development processes; and public service capabilities.

Intergovernmental relations

The scope of activities jointly covered by the Commonwealth, States and Territories is extensive, with expenditure on joint health, education and road transport responsibilities alone accounting for nearly 40 per cent of all government spending in 2015-16 (box 6.3).

At any point in time, there are likely to be serious questions as to the willingness of governments to cooperate in some reform areas. Today, energy and climate change might be at the top of the list. Education may have receded for the moment. Health has been an ongoing source of tension.

In a federated system — which this Report takes as given — and under pressure over revenue sharing as previously discussed, this is inevitable and wringing hands over it is unproductive. We bought it, we own it, we need to maintain it and make it work in the public interest. To do so effectively means constant attention to the difference between — on the one hand — inevitable outbreaks of political difference, and — on the other — persistent failure of governments to address looming damage to the wider public interest. It is the latter that should draw attention in a paper of this nature.

Federation
— We bought it, we own it, we need to maintain it
and make it work in the public interest

Box 6.3 Areas of joint Commonwealth and State & Territory responsibility

  • The Commonwealth, States and Territories are jointly involved in either funding or service delivery in a large number of policy areas. Among others:

    • Australian Government expenditure accounted for about 61 per cent of total public expenditure on health of $108 billion. States and Territories accounted for the majority of the remainder. As an industry, health care and social assistance employs more people than any other sector in Australia, accounting for nearly 13 per cent of total employment.
    • The Australian, State and Territory Governments together spent over $84 billion on education in 2014-15 (14 per cent of total government expenditure).
    • All levels of government (including local) are involved in funding transport infrastructure, as well as being involved in its regulation.
    • The Australian, State and Territory Governments are also involved in regulating energy supply, intervening regularly to influence the ‘market’.

    Many of the areas in which both the Commonwealth and the States and Territories are involved are subject to national agreements. Under these agreements, certain payments are used to support specified projects, and to facilitate policy reform and improvements in service delivery (SP 14).

    Sources: ABS, Government Finance Statistics Australia, Education, Cat no. 5518.0. (2017); ABS, Government Finance Statistics Australia 2015-16, Cat no. 5512.0 (2017); Vandenbroek, Parliamentary Library (2016); Australian Government (2017b); Australian Institute of Health and Welfare (2016); Queensland Government (2017); NSW Government (2017).

Despite the opinion of some, it would be erroneous to conclude that intergovernmental relations are ‘broken’. There is markedly more harmony among first ministers (COAG) in dealing with social policy and national security issues than on economic reform issues. The Commission understands that Ministerial Councils on Health, Agriculture, Treasury and Transport work reasonably well, as does cooperation among officials in preparation and follow-up.

In areas covered by this Report, consultation by the Commission across senior representatives of governments involved in both bilateral and full national exchanges indicate that there is a willingness to acknowledge the merits of other positions and work to effect change. And also a recognition that there is a dearth of other options.

While COAG may be long in the tooth and often appears an unseemly forum for exchanges with too much focus on the short-term, it remains the preferred vehicle amongst protagonists for exposing longer-term reform options to public scrutiny and breaking (occasionally) out of portfolio-level intractable disputes.

The fact that there is:

  • less success in this forum on longer-term matters in recent times; and that
  • market-based reforms that are often the basics of productivity improvement have been generally too easily dismissed as politically difficult

does not make it redundant, but it does argue for proactive and serious renewal. And renewal is necessary for a project like a Joint Reform Agenda to have a reasonable period of collective consideration before seeking final acceptance at a COAG level.

At least two matters deserve closer attention in considering renewal: the underlying trends that have changed the nature of federal relations, which have implications for how governments allocate roles and responsibilities for solving problems; and the high level of reliance by States and Territories on Commonwealth funding, which creates a range of inefficiencies.

The approach to intergovernmental relations has not kept pace with how federation has evolved

The increase in the Commonwealth’s policy reach into areas that have traditionally been the responsibility of the States is a product of several long-term phenomena:

  • High Court decisions such as the Uniform Tax cases (1942, 1957), the Tasmanian Dam case (1983), the State tobacco tax case (1997) and the Pape case (2009), which have expanded the Commonwealth’s powers, including to raise revenue15
  • social and economic changes (for example, the freer movement of people, goods and ideas, globalisation, the influence of trade agreements on domestic policy), which have broken down or blurred traditional boundaries between jurisdictions and linked local and national interests (the construction of a major port and the efficient functioning of cities is now seen as a local, state and national issue; concerns about the impact of inefficient taxes on economic growth drove the replacement of a range of State taxes with the GST in 2000, further shifting revenue-raising power to the Commonwealth) (Wilkins 2007).

There is likely to be continuing evolution in the matters deemed to be of common interest across governments. There are also continuing changes in how public services are demanded and can be delivered (changes to the delivery of health care services to better meet the needs of the community are discussed in chapter 2). These imply that negotiation on the roles of different levels of government are highly likely to be a periodic feature of intergovernmental relations for the foreseeable future.

But governments have not addressed this in any systematic way.

Over the past three decades, the model for achieving national reform has shifted from focussing on resolving select matters spurred by common concerns, such as dealing with the land rights implications of the High Court’s decision in the Mabo Case and improving productivity in the wake of the early 1990s recession, to one that is more ad hoc, with many more matters now subject to intergovernmental agreements.

A major factor that has come to dominate the dynamic of intergovernmental relations is the reliance of State, Territory and Local Governments on the Commonwealth for core funding. Specific purpose payments as a share of grants have grown since 2000, reflecting the Commonwealth’s desire for assurance on the prudence or efficiency of spending and, with its increasing interest in policy areas, to incentivise reform through control of payments (box 6.4).

Box 6.4 States and Territories’ heavy reliance on Commonwealth grants

  • In 2015-16, the States and Territories collectively raised only 55 per cent of their total revenue — by jurisdiction this ranged from just over 30 per cent for the Northern Territory to close to 70 per cent for Western Australia. Of the funding provided to the States and Territories by the Commonwealth in 2015-16, 46 per cent was tied funding (specific purpose payments (SPPs) for health, education, housing and other expenditure) and the remainder was nearly all redistributed as untied payments funded by GST revenue collected by the Commonwealth on behalf of the States.

    Most SPPs are provided to the States and Territories through agreements under the umbrella 2008 Intergovernmental Agreement on Financial Relations. There are seven national agreements covering healthcare, health reform, education, skills and workforce development, disability services affordable housing and Indigenous policy. Payments linked to the national agreements are indexed annually and funding distributed to States and Territories by share of population.

    Other SPPs support specific projects or reforms. These include the National Partnership Payments, which typically require the States to have met agreed outcomes specified in the relevant agreement to receive funding. There are also Project Agreements that provide a simpler form of National Partnership for low value or low risk projects. The latter are usually time limited.

    Health and education account for about two-thirds of all funding for SPPs. National Partnership Payments accounted for just over a quarter (26 per cent) of SPP funding.

    While the level of untied grants increased with the introduction of the GST, tied grants have increased as a proportion of the States and Territories’ funding, and for this portion of funded activity, outcomes are conditional on the actions of both tiers of government.

    Significant time and resources are devoted to negotiating and monitoring adherence to the terms and conditions of funding agreements. In health and aged care, the mix of funding and policy responsibilities among the various tiers of government has undermined the capacity for genuinely integrated care (chapter 2).

    States and Territories’ heavy reliance on grants also creates uncertainty for budgeting and planning as grants can be unilaterally reduced to meet the changing priorities of the Commonwealth (natural disaster funding being one example).

    Sources: PM&C .(2015); Australian Government (2016a).

Added to this in recent times is the era of social media and immediate communications for all — creating instant snap judgments — which has left governments in an invidious position: try to meet people’s expectations and do so in real time; or try to explain why this might be undeliverable and risk the judgment of failing to communicate or failing to appreciate the issue (or generally, both).

The Commission was told that funding is often the focus of and a major lubricant for intergovernmental cooperation. We were also told that some matters are being elevated to COAG not because of their policy import but because they have funding implications, which under budget constraints require authorisation at first ministers’ level (especially if trade-offs are required across portfolios). The situation contrasts with the National Competition Policy program, where financial payments from the Commonwealth to the States were an ancillary, though important, reform tool whose rationale was based in the revenue that States might forgo for undertaking reforms.

Several have criticised COAG gatherings as now being overly adversarial, too transactional, overburdened with agenda items and focused on arguments about funding.

Set-piece forums like COAG must always carry high expectations, and so disappointments. These aggregate over time, and the forum itself must bear the responsibility.

The poor incentives associated with buying reform, and alternatives to it

In a circumstance of strong fiscal dependency (vertical fiscal imbalance as it is usually labelled) there is a deep temptation to achieve change through control of payments.

But the temptation should be resisted, in favour of other alternatives.

The power of financial payments as a tool to compel is limited by budget capabilities at the Commonwealth level. It compounds a poor fiscal position to recognise that, if buying reform is the only way to move ahead, we will be unable to apply any necessary productivity-enhancing change until the fiscal position improves. Since much of productivity-enhancing reform is the source of catalytic behaviour in private investment and so in employment, a perverse outcome is that tax revenues cannot recover because we can’t afford to buy reform.

There is a deep temptation to achieve change through
control of payments, but this should be resisted

Added to that fiscal perspective is the cost — to efficiency and decision-making capability — of conditions and judgments that inevitably have to be made in support of payments. This reinforces the problems of poor accountability, where the States and Territories can point to insufficient funding or the conditions set by the Commonwealth for suboptimal outcomes and the Commonwealth to the States and Territories for poor local decisions or delivery.

Pursuit of an agreed agenda — negotiated to ensure that State/Territory preferred reforms that improve the productivity dividend are added to the mix as a way of encouraging worthy change and offsetting potential cost — is an objective that should be tried before defaulting to purchasing change.

A possible exception to this might be where a reforming party to the agreement can demonstrate exceptional financial loss. But this can be set as a post-reform settlement, rather than as an upfront schedule of payments regardless of whether the loss actually ensued.

The bulk of reforms in this report do not require significant implementation expenditure, and all are aimed at doing things better. In all instances, we envisage better quality outcomes and/or savings, a further reason to ensure that any costs are actual net across the package of reforms, rather than gross.

This is not to say that reform will be costless. However, parameters for negotiation on a reform agenda should support both sound policymaking and negotiators in achieving agreement. The impact of skewed cost burdens on any party is not ignored; rather the case is treated with respect and given a chance to demonstrate its bona fides.

Finally, relying on funding as a primary incentive for change is inimical in the longer-term to efficient government. The scope for inefficiency and poor outcomes, and necessity of spending significant time and resources on negotiating budget deals due simply to imbalances in revenue-raising, can and should be reduced.

Division of roles and responsibilities

Australia’s federation compares relatively well to other federations (SP 14). This is not least because governments have cooperated at critical times, including recently in responding to the global financial crisis. From a governance perspective, Australia is a single national entity because of federation, making it incumbent on all levels of government to do their best to make intergovernmental relations work.

Many commented to the Commission that the probability of governments working effectively together rests predominantly on the personal qualities of leaders and, to a lesser extent, senior officials, rather than structures that support their engagement, such as meeting arrangements. That is, such structures can play an important role in supporting the efficient functioning of COAG, but often ‘follow’ the cooperation of leaders, and on their own have little effect.

In this context, any advice on measures to support cooperative arrangements risks being self-evident, but the greater risks lie in this advice being ignored. Failure to deal with the implications of structural changes for federal relations has already created significant costs.

On the allocation of roles and responsibilities in areas of shared interest, governments should make practical decisions based on the nature of the policy problem at hand, future risks and how best to solve challenges, rather than primarily on who has funding capacity, or historical circumstances. In this report, we have found compelling arguments to re-orient control in healthcare and roads management to State and Territory Governments.

In a similar vein, governments should pursue bilateral or multilateral agreements (rather than across-government agreements) where this would be a more efficient and effective way of solving a problem.

The objective should be for the each level of government to have distinct roles in areas of shared responsibility, with incentives that recognise and promote the accountability of each government to their electorate.

This reinforces among other things that in areas of State and Local responsibility where the Commonwealth provides funding, State and Local Governments should be able to rely upon predictability in funding and flexibility in its use, subject to necessary measures to ensure accountability for decisions.  Further, the conditions on Commonwealth funding to other jurisdictions should seek to ensure sound decision-making by those jurisdictions, rather than dictate outcomes.

And reform to relieve pressure arising from revenue-sharing arrangements, as recommended earlier, would support more effective intergovernmental relations.

Principles for governance cannot replace action, but they can provide useful and important guidance for governments, as seen in the past. The principles communicated by Premiers and Chief Ministers in 1991 (box 6.5) still provide a sound framework for cooperation by governments.

Box 6.5 Federation principles — Premiers and Chief Ministers’ conference Adelaide 1991

    • Australian nation principle: all governments in Australia recognise the social, political and economic imperatives of nationhood and will work cooperatively to ensure that national issues are resolved in the interests of Australia as a whole.
    • Subsidiarity principle: responsibilities for regulation and for allocation of public goods and services should be devolved to the maximum extent possible consistent with the national interest, so that government is accessible and accountable to those affected by its decisions.
    • Structural efficiency principle: increased competitiveness and flexibility of the Australian economy require structural reform in the public sector to complement private sector reform: inefficient Commonwealth-State division of functions can no longer be tolerated.
    • Accountability principle: the structure of intergovernmental arrangements should promote democratic accountability and the transparency of government to the electorate.

Recommendation 6.4 Renew intergovernmental relations

STEPS TO ADVANCE CHANGE

First, while not broken, the system of cooperative exchange at the apex of Australia’s federation — COAG — is in need of renewal. This is not an expensive undertaking — it has a cost only if it is insincere.

In order to arrive at agreement on fundamental reform at the apex, a practical division of responsibilities that is focused on the nature of the policy problem at hand and the parties most willing to design effective change should be taken. This means not treating the existing intergovernmental committee structures as sacrosanct.

Seeking reform primarily through control of payments should be least preferred.

Policy development and evaluation

Few comment when governments function well and the reverse occurs when things go wrong. But the lack of confidence evident in the survey work cited earlier in this chapter, aligned with the immediacy and snap judgments of media, ensure that each failure becomes less an exercise for learning how to do better and more an exercise in swift judgment regardless of fault.

There is sufficient evidence from recent reviews of government performance (box 6.6), however, to indicate that the continuation of approaches in several areas will not serve us well.16 Of particular importance are non-adherence to standard requirements for due diligence on policies, and a culture of excessive risk aversion leading to the belated discovery of mistakes and centralisation of decision-making.

Several reviews have noted that excessive risk aversion has led to provision of advice that is assumed governments want to hear, and a reluctance to report risks or mistakes for fear of being blamed.

Box 6.6 Selected reviews of government performance and capabilities

  • Ahead of the Game Blueprint for Reform of Australian Government Administration (2010)

    The Advisory Group looked at ways to improve APS performance in the provision of services, programs and policies for the Australian community. It recommended greater citizen involvement in design of government services. Also, that the APS strengthen its capacity to provide strategic policy and delivery advice, invest in capability through improved human resource management, strengthen the focus on efficiency and quality by building a reliable evidence base on the efficiency of public agencies, and remove red tape. The Government accepted all of the Advisory Group’s recommendations.

    Report on large government policy failures (Shergold review) (2015)

    The review was asked to recommend ways to enhance the capacity of the Australian Government to design and implement large public programs and projects following a series of major failures. The review made 28 proposals relating to the provision of robust advice, supporting decision-making, improving risk culture, enhancing program management, greater public service diversity and adapting to changing policy environments. The review confirmed findings from the Ahead of the Game report regarding the need to improve experience through mobility programs, and the concerns of capability reviews regarding public sector project management skills and program management practices. The Government instructed Secretaries of Departments, through the Secretaries Board, to consider the report and its conclusions.

    Independent Review of Internal Regulation (Belcher review) (2015)

    The Belcher review, commissioned by the Secretaries Board, found that many internal Commonwealth regulatory requirements were appropriate and efficiently administered but there was also evidence of over-regulation, inefficient regulation, and unclear and inaccessible regulations and guidance. It also observed that there was a culture of risk aversion, which is reflected in a disposition towards over-regulation of both the public sector and regulated industries. Recommendations to address these issues included removing duplication of reporting, improving access to information, clarifying guidance and better ways of engaging with risk. The Review confirmed the findings of many capability reviews (below) regarding excessive risk aversion and centralised decision-making. The Secretaries Board agreed to implement all recommendations, although it noted that some required consideration by the government.

    Capability Reviews of Commonwealth agencies (2011-2016)

    Capability reviews arose out of a recommendation of the Ahead of the Game report. The reviews were to be conducted on a regular basis to assess strategy, leadership, workforce capability, delivery and organisational effectiveness. Common findings included significant levels of risk aversion and centralised decision making at senior levels, which restricted innovation. Many departments were observed to struggle with project management. While some agencies collected vast amounts of data they failed to use that data profitably because they lacked the skills or because of dated IT systems.

    Independent reviews of recent programs (various)

    Reports by Commonwealth and State audit offices, commissions of inquiry and parliaments on programs including: the VET FEE-HELP scheme; Victorian East West Link Project; Queensland’s shared IT services; NSW’s Learning Management and Business Reform project; Centrelink Online Compliance Intervention system; the Home Insulation and Building the Education Revolution programs, and management of contracts.

At the Commonwealth level, aversion to risk and the centralisation of decision-making has seen innovation being suppressed and skills in making judgements atrophy. With limited experience of judging the taking of risk when the costs are small and predictable, the ability to handle crisis (when they are large and unpredictable) is increasingly challenging.

Despite attempts to inculcate cultural change, including introduction of new legislation (the Public Governance, Performance and Accountability Act 2013 (Cth) (PGPA Act)) to rebalance guidance in favour of supporting capabilities and better managing risks, the most recent reviews indicate that attitudes of risk aversion prevail.

With no experience of judging the taking of risk
when the costs are small and predictable,
the ability to handle crisis when they are large
and unpredictable is increasingly challenging

The Belcher review observed that such attitudes are giving rise to over-regulation both of the public service and externally. The PGPA Act itself was introduced alongside a range of procedures, manuals and policies specifying how agencies should conduct their operations.

On due diligence, it is apparent failures in public administration do not arise, for the most part, from want of guidance. A major problem is that this is not always adhered to, but it is also clear that rules are only good if they are able to be applied and applied well — a function of will, capabilities and their practical use.

Common causes of avoidable mistakes have included: not basing justification for, and design of, policy interventions on adequate evidence, including advice from stakeholders; failure to properly undertake or heed the advice of regulatory impact appraisals; not following cabinet processes; and haste resulting in poor planning.

The complexity of issues has also not always been matched by the capabilities of staff. At the Commonwealth level, reviews indicate there is an underlying need to strengthen policy advising capacity, particularly on the development of evidence-based policy (including through data analysis and stakeholder engagement), program planning and implementation. Other reviews have pointed to the sheer workload on public servants, which stifles strategic thinking.

Cultural change is needed to make rules work

Governments and public service heads have largely accepted the proposals of the review reports we have scrutinised but, at least at the Commonwealth level, it is difficult to discern significant change.

This is not to say that there are not examples of good practice or improvement. Inquiry participants have pointed to, for example, alternative service delivery models emerging in the social services sector as exemplars of innovative collaboration among stakeholders, and several agencies have sought to change their internal cultures by reducing decision approval points and increasing the degree of delegation (SP 15).

There has been little in the way of public commitments on what will be done in response to the sector-wide and agency capability reviews, however, or follow-up to determine their impacts. Recent reports indicate that more needs to be done across the public sector.

On one hand, this raises questions about the effectiveness of arrangements in place to implement the recommendations of reviews.

Or perhaps it is the case that the cultural issues start even higher up — at Ministerial level and beyond in the public arena, as public servants are blamed for results that are primarily not of their making. Such lessons reverberate powerfully, regardless of the words of reviews.

We suggest below measures to improve the likelihood of advance in public sector reform. More importantly, a fundamental change in culture seems to be required — that which gives permission for agencies (by ministers) and staff (by agency leaders) to take well-calculated risks in pursuit of improvements in policy and administration, and hence creates genuine scope to change the way things are done.

Cultural change starts with Ministers and agency CEOs

Ultimately, Ministers need to encourage — indeed, require — the sort of organisational change that is needed to obtain sound policy advice and administration. A further critical ingredient is confident leadership by agency heads — to provide their staff the ‘space’ to undertake thoughtful policy design, encourage creativity in ideas, and also support their staff in giving governments full and constructive advice.

Accountability for change

To help ensure progress on identified problems, and prompt support for change where this is needed:

  • the Australian Public Service Commission (APSC) should evaluate what has been done in response to the themes arising from agency and sector-wide reviews over the past five years, and the impacts of changes. If progress is found to be poor, an educative process should be put in place, for example, in conjunction with the Australia and New Zealand and School of Government, or similar body, to re-authorise and train public servants in better managing programs and supporting innovation
  • in agreeing (either in part or whole) to the recommendations of reviews, responsible entities should commit to specific deadlines for delivery.

Separately, the APSC is currently assessing the capability review program with a view to designing a new agency review framework. The above measures could be complemented by the issuance of charter letters by the Secretary of the Department of Prime Minister and Cabinet to department CEOs, stating expected agency capabilities, leadership qualities and reform priorities to lift those (for example, to counter risk aversion, and support evidence and stakeholder input-based policy) (SP 15).

The Joint Committee on Public Accounts and Audit (JCPAA) has in the past reported on progress in implementing the recommendations of Commonwealth public sector reform initiatives. The JCPAA could be tasked by parliament to oversee progress on agreed sector-wide reforms on an ongoing basis.

Public service workforce

The available evidence suggests that public sector capabilities would be improved by:

  • in recruitment, training and performance management processes, placing emphasis on the development of specific skills to support evidence-based policy development, policy delivery and risk management, and/or program evaluation, as appropriate
  • encouraging more staff exchanges and secondments within and outside of the sector, which would develop staff and increase opportunities for interesting work
  • greater devolution of decision making responsibility to junior staff (with training and support) to build capabilities and reduce the risk of policy failure by allocating responsibilities to staff best (including most efficiently) positioned to handle them.

The APSC has designed a range of workforce capability initiatives targeting these outcomes but evidence on the adoption of specific strategies — which include talent management, learning and development and formal staff exchange programs — is mixed (SP 15). Accountability for progress on these matters would be helped by the institution of charter letters, as discussed above.

Recommendation 6.5 Ensure accepted Public Service reforms are implemented

HOW TO DO IT

The Australian Public Service Commission (APSC) should evaluate what has been done over the past five years in relation to the themes arising from agency and sector-wide reviews. The APSC evaluation should be used to inform subsequent training initiatives to address any shortcomings.

The Australian Government should:

  • require the entities responsible for implementing the findings of reviews to commit to deadlines for delivery and report publicly against implementation timelines
  • require the Secretary of the Department of the Prime Minister and Cabinet to issue a charter letter to each department head at the start of government terms outlining expected agency capabilities and public sector reform priorities to lift those.

The Joint Committee on Public Accounts and Audit could be tasked by Parliament to oversee progress on agreed sector-wide reforms on an ongoing basis.

Improvements in internal disciplines

Policy appraisal requirements (both ex ante and ex post) are only one of the conditions that need to be satisfied for good policy development, but a critically important one, with their importance highlighted by the many instances of avoidable costs or failure. The focus should be on making a sound case for policy, however, rather than simply adhering to rules. Appraisal processes can have little effect when there are political exigencies. And a common complaint is that Regulatory Impact Statement (RIS) requirements are applied or policed dogmatically, with the policy object lost for the compliance trees.

A clear lesson on the handling of situations under time pressure is that risk management needs to be given even greater importance. An important element of this and a safeguard for governments is consultation with stakeholders on policy ideas and how they could be implemented, which helps better identification and understanding of risks.

More generally, several reviews have highlighted the importance of close collaboration between the public service, service delivery agents and stakeholders in designing and implementing programs. These are tasks that necessarily cannot be wholly undertaken by senior executives, and point again to considered devolution of responsibility to lift agency capabilities and ensure that enough effort is being devoted to identifying, monitoring and correcting the potential for things to go wrong.

On risk appetites and management, particularly in dealing with new or intractable problems, governments should consider whether experimentation or pilots could help. They are a practical way of informing the better design of policy, but as a sanctioned part of policy development processes could help:

  • better define acceptable levels and avenues of risk (in a systemic sense) for the agency given the insights that they can bring into service users’ behaviour
  • agencies develop better management responses over time to the materialisation of risks (and in doing so provide some predictability on how issues will be managed when they arise, and by whom)
  • by encouraging and providing an avenue for innovation in policy and program design — and recognising that good ideas can come from any person — change attitudes of risk-aversion and over-caution in the public service; and
  • ensure that policy risks, when they do not pay off, do not result in considered experimenters being punished.

And lessons from trials can be taken from elsewhere (below).

Be willing to use evidence-based advice developed elsewhere

Most policy issues are shared in common with governments elsewhere. The costs and risks of policy development should be reduced by making greater use of learning from their experiences, adopting or adapting what has worked elsewhere, and not delaying introduction of new processes and approaches by adopting unique Australian standards. There should be a predisposition in favour of accepting high quality international standards (for example, chemicals) and using existing information already developed elsewhere (for instance NICE in the United Kingdom for clinical practices and drug therapies).

This will become increasingly obvious (and costly) in motor vehicles, as the local industry phases down, should unique Australian standards persist. The recent experience with potential new emissions standards will need to be repeated on multiple fronts in future years, as regulation catches up with reality. Governments that eschew unnecessary red tape should recognise that being in accord with international standards is not a matter of pick and choose.

In the same vein, governments should adopt a global orientation in using evidence. There are now thousands of randomised control trials (RCTs) undertaken every year, and while the outcomes from many will be context-dependent, there is little systematic analysis of the lessons from globally undertaken RCTs that could be a basis for better programs and service delivery in Australia. Unnecessary bureaucratic obstacles to the use of RCTs (for example, unnecessary ethical clearance for low-risk interventions) should be removed.

Program evaluation linked to decisions

Strengthened requirements for program evaluation would support government budget prioritisation and resource allocation decisions.

At the Commonwealth level in the decade to the mid-1990s, all budget funded programs were required (by statute) to be evaluated every 3 to 5 years, with evaluations integrated into the budget process. Evidence suggests that evaluation findings made a substantial contribution to Cabinet debate and the development of policy options. For example, surveys conducted by the Department of Finance show that across the 1990-91 and 1994-95 budget years, the proportion of new policy proposals influenced by the findings of an evaluation rose from 23 per cent to 77 per cent. Evaluation findings were also used by line departments to improve operational and internal management systems.

The evaluation system ended due to a combination of concerns from line departments about the administrative burden of planning and conducting evaluations, a lack of program evaluation skills, and a shift toward greater contestability in policy advice, which lessened the demand for systematic use of evaluations in the budget process (Tune 2010).

This is a pity. A lack of evaluation work is evident regularly when the Productivity Commission (and perhaps other agencies with similar interest, such as the Auditor General) are asked to scrutinise areas where policy delivery is perceived as weak or failing.

Taking into consideration the lessons from the past, a more effective program evaluation system would include the following features:

  • There should be greater use of sunset clauses on programs with a fixed deadline for the completion of an evaluation before new funding is committed, an approach similar to that used for assessing the efficacy of regulatory instruments.
  • Similarly, governments should consider making the continuation of program funding conditional on completion of an evaluation and the rectification of significant problems identified, where this would be an effective incentive.
  • Evaluation priorities should be risk-based, with larger or ‘repeat offender’ programs subject to the earliest scrutiny, similar to the approach to performance audits by audit offices.

There should be no areas that are immune from the normal standards for appraisal. And clearly failing programs should be defunded.

Recommendation 6.6 Strengthen internal capabilities

Australian Governments should implement a suite of changes to strengthen policy development and delivery.

HOW TO DO IT

No policy areas should be immune from proper appraisal — ex ante and ex post. But Regulatory Impact Statement processes should emphasise sound policy-making rather than simply adherence to rules.

To help ensure that programs remain well-targeted and administered, governments should make greater use of sunset clauses on programs with a fixed deadline for the completion of evaluations before new funding is committed.

Similarly, governments should make the continuation of program funding conditional on completion of a written evaluation (and the rectification of significant problems identified in the evaluation).

Governments should adopt high quality international standards wherever possible and make  better use of information and evidence developed elsewhere (including randomised controlled trials).

6.6 Supporting Local Government

Local Government forms an important third tier of government, acting on the delegation or authority of the States with respect to functions that are deemed to be most effectively and efficiently implemented at the local level, and otherwise providing public services to serve the particular needs of local communities.

There has been a general increase in the scope of Local Government responsibilities, reflecting greater devolution of State and Territory functions over time and the desire of Local Governments to fill perceived gaps. For example, it is not unusual for councils to be responsible for food safety inspections, childcare, housing, and distance education services.

A core function of most is administering planning and zoning regulations, although the degree of complexity in undertaking these functions differs (planning regulations are discussed in chapter 4).

Common concerns raised by inquiry participants included the ability of Local Governments to meet greater demands, and questions about incentives for, and visibility of, performance. Previous inquiries and studies by the Commission have pointed out that State Governments have delegated functions to Local Governments often without clear policy frameworks, well-designed support or adequate resources to fulfil these functions (for example, in relation to planning functions and natural disaster management).

In 2014-15, Local Governments raised almost
90 per cent of their own revenue

Do Local Governments have the capacity to perform their roles?

Is bigger better?

The increase in scope of activity has raised concerns about the capacity of Local Governments to perform their roles. Much of the effort to improve the efficiency and capacities of Local Governments has involved the amalgamation of smaller councils into larger entities, which has allowed councils to take advantage of scale in the provision of services and pool resources and technical capabilities. As an alternative to mergers and amalgamations, neighbouring Local Governments have also entered into collaborative arrangements on a voluntary basis to share resources and provide services.

Amalgamations initiated by State Governments have proved to be highly contentious.

The evidence as to whether amalgamations do result in more efficient and effective service delivery is mixed. Economies of scale do clearly exist; the question is do they offset other perceived losses such as local connectedness to their council. A simple and preferable step before amalgamations would be for residents and ratepayers to receive a professional assessment of the trade-offs of ‘standing alone’, a cost/benefit consideration that would be better informed over time by more meaningful comparative indicators of performance (below).

Constraints on the revenue raising capacity of Local Governments

State Governments and the Northern Territory impose restrictions on the revenue-raising capacity of their Local Governments either through requiring them to provide concessions to particular groups and/or through capping Local Government rates.

In 2014-15, Local Governments raised almost 90 per cent of their own revenue, with grants and subsidies making up the remaining 10 per cent. (Local Governments are responsible for about 5 per cent of total public sector spending and collect 3.5 per cent of Australia’s total taxation revenue) (SP 16). However, there is considerable variation in the own-source revenue raising capacity of Local Governments, with those in remote areas having fewer sources of revenue and greater reliance on grants.

Caps on property rates are currently in place in New South Wales and Victoria. For a State Government, rate capping can constrain rate increases and protect ratepayers from excessive rate rises by Local Governments. Given Local Governments remain a responsibility of the States, they have an interest in ensuring Local Governments act responsibly, and the rate capping process allows State Government supervision of rate increases. However, for Local Governments, rate capping means they must either find another revenue source or reduce expenditure. In principle, this should force greater prioritisation of demands or improvements in efficiency, but constraints would also ideally be set by the electorates to whom they are accountable.

The use of independent regulators in New South Wales and Victoria to set rate increases, and review and approve any proposed variations to rates, has helped to ‘de-politicise’ the process and provided some flexibility, allowing genuine local needs to be met. Some, however, have criticised rate capping on the basis that its absence in other jurisdictions gives no cause for a concern that large rate increases would occur if capping were removed.

One area where the impact of constraints on revenue-raising should be more closely assessed is the capability of councils.

The quality of Local Government decision-making is often criticised and yet this level of government is responsible — in principle, at least — for one of the most important decisions that can generate employment nationwide: the investment by a myriad of small and medium sized business in land or building developments and service improvements. Poor capability will be reflected in poorer investment outcomes, all other things being unchanged.

Available evidence suggests that there is considerable variation in workforce capability, with smaller rural and regional governments often facing difficulties in being able to provide and maintain the range of technical and professional skills — for example, engineering, IT and health related roles — required to undertake their role.

Local Governments, where possible, have responded by sharing professional and technical staff between councils. For example, Local Governments in north-western Tasmania and in the Riverina region of New South Wales have arrangements in place to share staff. Nevertheless, State Governments also need to be cognisant of the resources available to Local Governments, both in terms of finances and workforce capacity, before devolving additional responsibilities to them.

Better performance measures needed to incentivise improvement

There are longstanding concerns that there is little way to discern whether Local Governments are, in fact, delivering services efficiently and providing the services that communities value most. Participants have noted that performance incentives for council administrators are not linked to providing the services communities want or providing them efficiently (Taylor sub. 28).

At present, there are multiple aspects of performance that Local Governments around the country are required to report on, including financial performance, service delivery and governance. While much work has already been done on collecting the information, it needs to be accessible and comparable. Providing data on the scope, quality and efficiency of service provision across comparable councils would allow communities to better engage in council processes and make more informed decisions at elections. This type of benchmarking can provide more information that councils can use to identify the scope for improvements, as well as placing greater pressure on them to improve.

Victoria’s recently introduced Local Government Reporting Framework provides comparatively more useful information (box 6.7) that could be drawn on by other jurisdictions. In undertaking its scheduled review of rate capping by 2021, it would be useful if the Victorian Government also looked at the companion issue of the effectiveness of the performance reporting regime in promoting the quality and efficiency of council services. In principle, strengthened accountability through this mechanism should lessen or obviate the need for stringent rate controls.

Box 6.7 Victoria’s Know Your Council reporting framework

  • The Victorian government’s Local Government performance reporting framework requires councils to report indicators across four categories: service performance, financial performance, sustainable capacity and governance and management.

    The indicators are provided on the ‘Know Your Council’ website, which allows the public to see detailed profiles of individual councils. Council profiles include information on the geographic and population attributes of the council area, finances, and performance results for the four categories. Websites provide opportunity for the council to explain or comment on their results.

    The public can also compare performance of similar councils. Victorian councils are divided into five categories: metropolitan, interface, regional city, large shire and small shire.

    Source: Local Government Victoria.

RECOMMENDATION 6.7 Support local government performance

State and Territory Governments should draw on the experience of Victoria and require more meaningful (including comparable) performance reporting by Local Governments, providing support on this where needed.

HOW TO DO IT

The Victorian Government’s reporting framework could be used as a model or starting point for other States and Territories. The more effective use of performance measurement would:

  • improve the accountability of Local Governments to residents and taxpayers
  • identify best-practice methods in Local Governments for future policy development
  • provide an incentive for Local Governments to improve their performance by highlighting differences in performance between similar Local Governments.

Footnotes

  1. More recently, the Chaplains case clarified limits of Commonwealth policy reach, finding that, in most cases, the Commonwealth requires some form of legislative authority in order to expend public money. Locate Footnote 15 above
  2. The focus of this section is predominantly on Commonwealth administration, where there is comparatively more information on sector-wide performance. Locate Footnote 16 above

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