Healthcare – why quality matters
Speech
Chair Michael Brennan gave the opening keynote address at the Australian Healthcare Funding Summit, held on 25 November 2020.
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In 1959, the US Postal Service and US Navy combined to showcase a technological marvel. They fired a missile containing 3,000 letters from a Navy submarine in international waters, which duly arrived in Mayport, Florida 22 minutes later. The letters were taken to Jacksonville and then sent on to their ultimate recipients (because it was a stunt, the letters were mainly postcards addressed to then President Dwight Eisenhower).
The event prompted then US Postmaster General Arthur Summerfield to make a bold prediction. He is quoted as saying:
“before man reaches the moon, mail will be delivered within hours from New York to California, to Britain, to India or Australia by guided missiles. We stand on the threshold of rocket mail.”1
Sixty years on we can see he was wrong, but sort of right – we now deliver mail in seconds to and from all those places – even Australia – albeit without the help of guided missiles.
We live in an uncertain world, but have an uneasy relationship with uncertainty. We love a good prediction – and we’ve always been drawn to those who predict – the seers, augurs and fairground fortune tellers. And, as a last resort, the economists.
The story about rocket mail tells us something about one way we tend to get our predictions wrong. Namely that we tend to predict future trends by a linear extrapolation of a past trend, but on a single dimension, while we hold everything else constant.
In the 1950s, the technology of transport was rapidly accelerating, and had for 100 years. The delivery of letters had moved from horses to trains, ships, motor vehicles and then aircraft, and rockets seemed like the logical next step.
What we didn’t foresee in the 1950s was that the real story wasn’t about the missile. It was about the letters. We were so enamoured by the continued increase in speeds that they would eventually hit physical limits, while innovations in information would ultimately see the relative decline of the letter, via a whole new direction of positive and far reaching change.
That we have trouble foreseeing the future isn’t a fatal problem. One thing the current pandemic reminds us is that risk management is more than a predictive science. It is not just the quality of our crystal ball, which after all is often pretty opaque – it’s mostly about how well we respond and adapt to unexpected changes when they occur. Positive or negative. That is true for individuals, firms and entire systems.
What can this story tell us about health? There have been two big trends in health in the developed world: rising spending as a share of GDP, and the long and consistent rise in life expectancy over the last century and more.
The second slide in my pack shows the rise in spending per capita for selected countries including Australia, and the rise in life expectancy that it has implicitly purchased. It seems a reasonable return – perhaps a windfall gain – on our health investment, now a bit over
9 per cent of GDP.
And my third slide shows that Australia achieves a high life expectancy for our health spend. Few countries achieve higher life expectancy with a lower spend as a share of GDP. And there are plenty that achieve the opposite – more spending for shorter lives. The United States is the outlier here.
The rise in life expectancy is indeed a remarkable story. Here is the headline fact: In 1886 – not that long ago in the sweep of human history – life expectancy at birth for an Australian male was 47 years. In 2016 it was 81. So, a 33 year increase in life expectancy over 130 years. By any measure, that must be regarded as a stunning transformation – a 70 per cent increase in lifespan per Australian.
So what might be extrapolate from this? Could we see something similar over the next 130 years? Will the bargain continue as before: with even longer lives in return for a consistently rising health spend as a share of Australians’ incomes?
Of course, we don’t know. But it’s possible that, like mail by rocket, we shouldn’t just assume that our future health spend will be primarily about purchasing longer lives; or at least not at the same price per year of increased life expectancy that we have seen in the past. Part of the reason the future might not look like the past becomes evident when we look at the big drivers of the rise in life expectancy since 1886.
By far the biggest influence has been the fall in infant mortality, and deaths in childbirth. My fourth slide has charts showing age-specific mortality rates since 1886. You can see that the biggest falls have been at birth, where the mortality rate is just 2.6 per cent of what it was in 1886. There are similar falls in mortality for women aged 20 and 30, most likely the effect of reduced deaths in childbirth.
As an aside, you can see the rise in mortality for 20 year old males during the 1960s, peaking in 1973 and then falling. This period coincides with the rise and then spectacular fall in the road toll.
Of course, the point is that a fall in infant mortality has a huge impact on average life expectancy, as babies then go on to live much longer lives. But it’s hard to replicate, because once infant mortality has been reduced to very low levels, it’s hard to get further increases in overall average life expectancy from this source.
The fifth slide underscores this remarkable trend: In 1886, believe it or not, the annual mortality rate of a 65 year old man was less half that of a baby, while by 2017, it was nearly 200% higher.
My sixth slide shows the rise in life expectancy at different ages since 1886. Again, you see the big rise in life expectancy at birth, pretty significant rises in life expectancy at age 20. What is interesting is how little life expectancy changed for 50, 60 or 80 year olds over this period between 1886 and about 1970. Of course, there were many more people living to these ages in 1970 compared with 1886.
But the fact still remains that the life expectancy of (those rare) 80 year olds in 1886 was 85 – another 5 years; and it was no more in 1970. I find that a fascinating fact: for all our medical advancement over that 90 year period, we hadn’t worked out how to keep an octogenarian alive for much longer. From 1970, we saw incremental rises in life expectancy at older ages – still noticeably faster for the 50 and 60 year olds than for those aged 80.
Looking at causes of death tells us something about these trends. The seventh slide shows the composition of deaths broken down by some broad categories of cause. You can see the big fall in infectious diseases in the first half of the 20th century. You can also see that deaths from circulatory disease (e.g. heart attack) peaked in the late 1960s at around 55 per cent of deaths. Today it is more like a quarter.
This shows the impact of a blockbuster innovation like statins – that is, the role played by big pharmaceutical breakthroughs. And this coincides with the slight but steady rise in life expectancy at middle and older ages since the early 1970s.
The sad fact about this chart is, of course, that it has to add up to 100 per cent. A fall in one source of death must mean a rise in another cause, like cancer. We can only speculate about what might drive another big shift in this chart in the future.
Noting that even if we don’t find cures for many things, treatments can still prolong lives, perhaps materially. But my point is that a quick look at the drivers of past increases in life expectancy suggests that we can’t assume that the future trajectory will look the same as it did in the past. We can’t just do a linear extrapolation. There’s a vigorous debate about the limits to human life, but in a society with already high life expectancy, it may be that the most important benefits from a better healthcare system lie elsewhere.
That is, we have to be open to the possibility that future gains in health outcomes might come in a different form than living longer. One candidate – perhaps the most obvious candidate – is quality. Because arguably it’s not just total years of life that matters, but also the total years of life lived in good health. Quality as well as quantity.
At the moment, Australia ranks relatively high for the number of years lived in in poor health (my eighth slide). That is a function of high overall life expectancy, but a rising burden of chronic disease.
In fact, if you look at the share of life lived in good health, Australia ranks 2nd worst in the OECD, part of an Anglo-Saxon club with the US, New Zealand and the UK. (Illustrated by my ninth slide.) This is bad news, but with a silver lining.
When you are a long way from the frontier (or best practice), you arguably have more scope to make rapid gains. (By contrast, Australia is much closer to the frontier when it comes to overall life expectancy, so the scope for quick wins there might be less.)
Some figures from our recently released report on mental health illustrate this point.
We estimated the total detriment to the Australian community from mental ill-health at up to $220 billion a year. Around $70 billion of this figure is economic impact, in that it comprises things like government expenditure and lower participation and productivity. The remaining $150 billion is the cost to individuals from living with mental health or – tragically – dying prematurely.
These estimates are, by their nature, imprecise. But the basis for our calculation is the epidemiological concept of a disability adjusted life year.
In short, we estimate that Australians lose around 710,000 years of healthy life due to mental illness. Around 20 per cent of that figure is due to years of life lost – premature death due to suicide, which is unquestionably a tragedy. But note that 80 per cent of the impact is borne in diminished quality of life for those living for many years with a mental illness.
Our contention is that there are huge gains: certainly in preventing suicide, but also in improving the quality of life for those who spend many years dealing with the burden of mental ill health.
For the most part, that isn’t about finding a ‘cure’, although our research suggests many people can improve their underlying mental health over time with the right treatment and services at the right time.
Similar things could be said of chronic disease, where a better service system might improve people’s management of their condition, prevent hospitalisations and help people to live fuller lives.
With this in mind, the Commission has commenced a project on behalf of state governments looking at preventative, integrated health programs across Australian states and territories; programs that aim to connect up parts of the system, particularly in relation to chronic disease management.
We also devoted considerable attention to this topic in our Shifting the Dial report in 2017.
You are all familiar with the problems:
- The rise of preventable chronic diseases associated with factors like diet and exercise – noting for example that Australia has now become one of the most obese countries in the OECD.
- A system dominated by two volume based behemoths: the fee for service MBS and the activity based acute system, both of which have driven considerable efficiency on one dimension (throughput) but arguably don’t provide enough incentive to keep people well … something we will no doubt hear more about from Danielle Romanes, Paul Gross and James Downie.
- There is the lack of integration between providers, and limited focus on the patient as the centre of the system. For example, the idea of patient reported outcome and experience measures is well accepted, but their use is limited, especially outside the hospital system … so it’s great that we have Professor Ellen Nolte presenting this afternoon.
- A lack of health literacy on the part of patients, which means they often cannot be joint managers of their conditions.
- Lots of data but very little data integration – something Sonja Read will address tomorrow.
- A large share of GPs don’t even know when one of their patients has been to hospital.
- There are overlapping responsibilities between tiers of government (with some gaps), and a fairly limited role for private health insurers – and I look forward to Shaun Gath’s presentation later today.
- We seem to have problems with disseminating good practice – as seen through significant clinical variation across practitioners and hospitals.
- A passive system – one that waits for patients to present to it once a problem emerges (or maybe some considerable time after the fact).
Our mental health inquiry found all these things specifically in the mental health system and a few more as well, including the lack of a coherent way in to the system.
I would add another weakness of the general health system, which is its selective approach to innovation: specifically, the incredible innovation in areas like pharmaceuticals, equipment or diagnostic techniques, combined with glacial change when it comes to business practices and the consumer interface. Rohan Mead from Australian Unity once described this as the distinction between molecular innovation (leading edge) and business innovation (complete laggards).
As I have noted before, it is interesting that a GP can refer a patient to have several high tech pathology tests, and they send the referral and receive the results by fax. You could make a similar observation about the rather quaint concept of a waiting room – not something you find in very many service industries today.
All these weaknesses have impacts here and now. Addressing them is not simple. It is a painstaking process consisting of lots of small steps by individuals across all parts of the system. But they can add up to very real and foreseeable benefits to users of the health system.
In mental health alone, our assessment was that implementation of what we identified as priority reforms (by no means all of our recommendations) could yield benefits worth an estimated $18 billion a year. Very little of this was in the form of increased GDP. It was mostly improved quality of life for those suffering mental illness.
But there is a broader point, which brings me back to where I started. We don’t know what the future will hold – in health or in anything else. Precise prediction is hard. But we can overcome that to some extent if we have systems which are resilient in the face of change; including being adaptable enough to meet opportunities when they arise. If future gains in health come from further technological breakthroughs, we can have some confidence that our health system can adopt and diffuse those gains quite quickly.
We have a robust process to list drugs on the PBS and to roll out subsidised vaccines. Hospitals have a track record of investing in new equipment. Granted we have to make sure the incentives for innovation are strong: via regulatory approvals, pricing policy and getting the balance right on IP protections.
But what if the next big wave is something else instead, like quality? That is, increasing years of healthy life through things like prevention, early identification, chronic disease management and better mental health? Is our system well structured, well positioned to deliver a revolution in person centred quality, as it did with infant mortality, statins, smoking or the road toll?
In fairness, that is an exacting standard, but I suspect most of us have our doubts. For all the successes of our health system, there is significant scope for improvement. Very little of that improvement will come in the form of a single big bang change, like the big bang of a missile delivering the mail.
And just as we need funding systems that support technology, we need funding systems that support the proper allocation of resources to living healthier lives. That inevitably means reconceiving how to address the funding rigidities between primary and hospital care, and to recognise that current funding systems create disincentives for preventative health.
When you look at our current starting point, it is easy to be discouraged. Our fee for service primary care and acute ABF systems are well entrenched; there are plenty of vested interests; lots of fragmentation; and there’s small matter of Commonwealth-State responsibilities.
Plus there is plenty that is good about our system – it does promote some efficiency, and for the most part good access.
So there is much that we want to preserve; all of which makes the task of reform that much more complex.
But we shouldn’t be deterred. There are a lot of good reform directions already underway; and lots of heroic good practice on the ground despite the disincentives inherent in our funding systems. And when I look at the line-up of speakers for the next two days, I am confident at least we have a pretty good idea of the next steps.
Footnotes
- https://www.saturdayeveningpost.com/2019/06/failure-to-launch-when-the-u-s-tried-missile-mail
Speech
Deputy Chair Alex Robson delivered a speech to the Queensland University of Technology (QUT) on the Philanthropy draft report.
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Introduction
Thank you for the invitation to speak today.
I want to begin by thanking Craig Furneaux and Wendy Scaife for their work in arranging this event. I would also like to acknowledge the value of the work of academic research centres like ACPNS and others - and how the work of people likes Myles McGregor-Lowndes and his colleagues at QUT has been so influential in informing policy development in this area.
Today I would like to discuss some of the analysis and recommendations in our draft Productivity Commission report on philanthropy, entitled Future Foundations for Giving.
The terms of reference for the inquiry are wide ranging: from tax deductibility of donations to regulation; from motivations and trends for giving, to the effectiveness of philanthropy. And all in the context of the Government’s goal of doubling giving by 2030.
It is certainly the most comprehensive inquiry into philanthropy undertaken by a government body in Australia, and quite possibly beyond Australia as well. It builds on the work of those before us – the Not-for-profit Tax Concession Working Group in 2012-13, and of course the Commission’s own 2010 study into the not-for-profit sector.
The draft report
There is a lot to cover, and I will not be able to discuss all of the recommendations in detail in the draft report.
Instead, I will discuss some of the report’s big themes and explore some of the “thinking behind the thinking” that the Commission has been engaged in over the past year.
I will begin with a quote from Steve Landsburg, author of The Armchair Economist, who has long been one of my favourite authors.
Landsburg once said: “A few lines of reasoning can change the way we see the world.”
That will be the spirit of my remarks today.
The draft report focuses on three main areas which are designed to establish firm foundations for the future of philanthropy so the benefits of giving can be realised across Australia. The three main areas of reform are:
- DGR system reform: refocusing which charities can receive tax-deductible donations to help donors direct support to where there is likely to be the greatest net benefits to the community as a whole.
- Regulation: bolstering the regulatory system by enhancing the ACNC’s powers and creating regulatory architecture to improve coordination and information sharing among regulators.
- Information: improving public information on charities and giving to support donor choice and accountability.
The Commission's draft report did not recommend removing the charitable status of any entity or class of entities.
Motives for giving are diverse, and religious faith matters
But first, stepping back a bit, it is important to note that philanthropy generally involves the voluntary giving of money, time, information, goods and services, influence and voice to improve the wellbeing of others.
Given this definition, one fact that immediately emerges from the research on giving is that people and organisations can have complex and multifaceted reasons for giving – and these reasons can change over time.
Some motivations for giving are highly personal, such as those associated with an individual or family experiences or connection to religious faith or culture; while others are broader, such as wanting to make a difference or out of a sense of obligation.
Contrary to some recent public commentary, our report explicitly recognises the fact that religious charities in their diverse forms play an important and valued role in the lives of many Australians.
We also very clearly and explicitly note the fact religious faith and values can and do provide inspiration for donating and undertaking a range of charitable activities.
And we firmly believe some of our recommended reforms will make it easier for religious charities to contribute to the community and building social capital.
Given this diversity of motives for individual giving, our draft report looked at broader structural policy levers that, given these motives, would potentially alter incentives for giving.
Information is king
Any consideration of a policy lever needs to acknowledge the fact that philanthropic giving is not a conventional market with price signals, or where goods and services are exchanged for financial benefit.
While donors motivations for giving are quite diverse, due to absence of conventional price signals, and in the absence of other institutional arrangements, donors lack the information about which recipients are in the greatest need.
Institutions – charities – have sprung up spontaneously in order to address these informational barriers.
From a pure economic point of view, the role of a ‘good’ charity is to act as an intermediary between donors and final recipients, reducing the informational barriers and matching donor preferences and dollars with the needs of final recipients.
In doing so, a charity combines all the different inputs involved – money, people (including volunteers, importantly), knowledge and expertise, to deliver impact and benefit the community through furthering its charitable purposes.
The broader point is that information is king, and philanthropic networks are very important.
Overall, the information flows in the Australian philanthropic sector seem to work pretty well. But sometimes, like any market in economics, things can go wrong. And this leads me to my next point.
There is a case for government support of philanthropy
One of the first questions we grappled with in the report was whether there was a case for government support for philanthropy.
The Productivity Commission is the Australian Government’s independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians.
We apply robust, transparent analysis and we adopt a community-wide perspective. Our independence is underpinned by the Productivity Commission Act (1998) and our processes and outputs are open to public scrutiny and are driven by concern for the wellbeing of the community as a whole.
So our primary ‘client’ – for want of a better term – is the government.
If there was no role for government in philanthropy, we would have written a very short report!
But for various reasons, we think that there is a clear role for government support.
One role relates purely to resource allocation.
Markets and governments provide many goods and services, but there will always be gaps.
Philanthropy can provide funding for activities that the community values and constraints on governments mean it would otherwise be underfunded, or not funded at all.
By supporting philanthropy, government is indirectly helping to fill some of these gaps. This enables governments to focus on other priorities.
Second, acts of philanthropy can contribute to social capital – capital that benefits the community but would otherwise be underprovided. Social capital can have public good characteristics, and this immediately raises the possibility of government support.
Finally, philanthropy can be a source of risk capital and patient capital, in many situations where governments cannot.
It can also be a source of policy and program innovation, an incubator for addressing social challenges which, if successful, can be replicated and scaled up by governments.
And, if the innovation fails, it can provide important lessons for government about why certain programs or policies may not have worked.
In that sense, philanthropy can make a broader contribution to how we grapple with complex issues we confront as a society.
Incentives matter
Accepting that there is a role for government support of philanthropy, what might that support look like?
The first thing to note is that in Australia, most charity revenue comes from government grants and contracts.
Of the nearly $200 billion in revenue received by the sector in 2021, only about $13 billion came from donations from philanthropic donations from individuals, corporates, giving vehicles and bequests.
Our report focuses on this $13bn slice, but it is important to keep the broader context in mind, particularly the interactions between government grants and donations and whether grants tend to crowd in our crowd out voluntary donations.
So what are the policy tools available to governments to influence individual donations?
The major policy lever is our deductible gift recipient (DGR) system.
Under this system, individuals can claim a tax deduction for a donation, as long as that donation is given to a charity which has been granted DGR status. In 2019-20, 4.4 million Australians claimed $3.9 billion in tax deductions for donations.
But not all charities have DGR status.
So the DGR system really consists of two policy levers:
- The design of the deduction. Under the current system, the benefit to an individual taxpayer depends on the marginal tax rate that they face. Under our graduated tax system, higher income earners face higher marginal rates, and so face a lower tax price. But this is unlike any other deduction, because the more that is given, the more benefit is provided to the more marginalised and disadvantaged in our community, and the more we build social capital. It also means that the government – actually, other taxpayers - are shareholders or silent partners in billions of dollars’ worth of programs each and every year. So one policy question is: does this system incentivise more giving than would otherwise be the case, and what is the cost to revenue?
- The scope of the deduction: which charities should be able to access DGR donations?
On the first question, our estimates, using a very large data set from the ATO, give a very clear answer: the DGR tax incentive works, in the sense that thanks to the deduction, there is more individual giving in Australia than would otherwise be the case.
Trade-offs matter: incentives are not free
One way of viewing the tax deduction is in the context of the incomplete, asymmetric information that I discussed earlier: government is providing a signal to donors, putting an explicit social value on donations where no such market price exists, as a way of guiding individual behaviour.
Given that the tax deduction incentives additional giving, the next question is: how could its design be improved?
And one of the main issues here is that each time someone claims a deduction, there is less revenue available for other government priorities.
This raises the question of treasury efficiency: when considering a change in the deduction, would the increase in giving outweigh the loss in revenue?
To take an extreme, hypothetical example: one very simple way of doubling individual giving would be to have a very high tax deduction of (say) 300%.
But while giving would undoubtedly increase under such a system, the risk is that this would come with a very large revenue cost.
Individuals facing higher marginal tax rates (a low tax price) might tend to give more, but the revenue foregone could be large. The net incremental gain could be very low - even negative.
The broader point is that a change in policy in this area – just like other areas – is not free. There are benefits and costs, there is no free lunch.
It is also important to note, however, whether a tax deduction for giving is treasury efficient or inefficient is not the only factor to consider when designing a policy to incentivise giving.
Treasury efficiency only considers the total value of giving relative to forgone revenue – it does not account for the costs and benefits of giving or the other uses of forgone revenue.
- It does not consider the benefits that may flow from additional philanthropic giving that is incentivised by the tax deduction, including improved social capital.
- In some cases, the efficacy of delivering support through government grants – as an alternative to a tax deduction – may be reduced by government having imperfect information and the administrative costs to government and charities of managing grants programs.
- Giving to some organisations or programs will generate greater net benefits to the community than others (although assessing this can be highly subjective).
Our statistical analysis, again using a large ATO data set, does not suggest a strong case for changing the basic design features of the deduction based on the concept of treasury efficiency.
Individuals are responsive to the deduction, but they do not appear to be so responsive that the increase in giving that would flow from a more generous deduction would outweigh the loss in revenue.
The DGR system is broken
This then led us to the second policy lever of the DGR system: its scope.
And it is here that we found a system that was not fit for purpose.
Our report finds that there is no coherent policy rationale for why certain charities are eligible for DGR status, while others miss out.
- DGR eligibility requirements can inadvertently limit access for some smaller charities, which also tend to be more reliant on volunteers.
- The complexity of the system continues to increase as new DGR categories are added in a piecemeal manner.
- Charities that have multiple purposes may need DGR endorsement for each eligible activity, so accessing DGR status can be complex.
On other hand, we have had some feedback that reforming the DGR system has little relevance to the goal of increasing giving.
With respect, the Commission firmly disagrees.
While we take no position on the goal of doubling giving as a policy objective, we do think that in a system which lacks firm policy foundations, should the doubling goal be realised, there is a material risk that the current inefficient, inconsistent and unfair outcomes for charities, donors and the community could also rise. Therefore – and particularly in light of the doubling giving goal – we think that reform of the DGR system is clearly needed.
The system could and should work in a much better way, and that the scope of the reformed DGR system should be based on the following principles:
- There is a rationale for Australian Government support because the activity has net community-wide benefits and would otherwise be undersupplied.
- There are net benefits from providing Australian Government support for the activity through subsidising philanthropy.
- There is unlikely to be a close nexus between donors and beneficiaries, such as the material risk of substitution between fees and donations.
The Commission used the principles to assess classes of charitable activities, not individual charities. Applying the principles means that most, but not all classes of activities, would be eligible for DGR status. We refer to classes of activities, rather than purposes, because governments subsidise activities rather than purposes.
The deductible gift recipient (DGR) proposed reforms would have four possible outcomes for charities:
- Charities retaining DGR status: Most charities that currently do have DGR status, including public benevolent institutions, health promotion charities, animal welfare, environmental, cultural and formal higher education charities. More than 20,000 charities are in this group.
- Charities not gaining DGR status: Charities undertaking activities including advancing religion, advancing industry, as well as some aged care, childcare and education charities would remain outside the DGR system. About 15,000 to 20,000 charities are in this group.
- Charities gaining DGR status: Charities that currently do not have DGR status, such as those focused on advocacy and prevention, a wider range of animal welfare charities and many local community-based grassroots charities run solely by volunteers. An estimated 10,000 to 20,000 charities could gain DGR status.
- Charities with DGR status withdrawn: Mainly charities that have DGR status for school building funds or to provide religious education in government schools. Fewer than 5,000 charities are in this group.
Initial responses to the draft report have predominantly focused on the reforms to the DGR system. We have received a high volume of feedback centred around entities that will have their DGR status withdrawn. There has also been support for broadening eligibility for DGR status, including those engaged in advocacy and prevention activities.
The Commission’s draft recommendation on school building funds would apply equally to government, non-government, secular and religious education providers.
While there are sound reasons for governments to support the provision of school infrastructure, the Commission’s preliminary view is that providing tax deductions for donations for school buildings is unlikely to be the best way to direct support to where it is needed most.
There are several possible alternatives that could be considered, including, for example:
- a new and separate capped tax deduction
- a system of government funded matching grants which give explicit regard to private donations
- a system of capital grants that are designed in a similar way to Gonski recurrent funding
- making more use of arm’s length entities that receive donations (which could be tax deductible under specified circumstances) and which distribute them according to equity and other criteria
- inserting a clause in school building funds to require providing access to facilities by community groups, to reduce the relative incidence of private benefits as occurred for Building the Education Revolution funding.
Submissions have also focused on the Commission’s recommendation that the status quo be maintained for entities whose sole charitable purpose is advancing religion. Currently these entities do not have access to DGR status.
As I said earlier, contrary to much of the media commentary, the Commission explicitly recognises that religious charities play an important and valued role in the lives of many Australians. Religious faith and values can and do provide inspiration for donating and undertaking a range of charitable activities.
The contribution that such entities make in the community is one reason why they are already able to access some tax concessions associated with their status as charities, such as an income tax exemption.
The Commission has not recommended any changes to these other tax concessions, nor to the charitable status of religious organisations. However, the Commission did not find a strong policy rationale, in terms of net additional community benefits, for changing the status quo and expanding DGR to charities with the sole purpose of advancing religion.
On the other hand, some charities with the advancing religion subtype already undertake additional, separate charitable activities (such as advancing social and public welfare).
Under the Commission’s proposed reforms, which would expand the scope of DGR, these entities could gain DGR status more easily for these other, separate activities, which are shaped by a religious ethos and values.
For example, a local community based religious organisation whose activities also include providing support for those experiencing disadvantage, could obtain DGR status for those activities which advance social and public welfare without the need to set up a whole new entity and obtain public benevolent institution status.
There are also charities with a religious ethos currently endorsed as DGRs, such as public benevolent institutions working to address disadvantage. They would continue to be eligible for DGR status.
Ancillary funds: what exactly do they do?
A related contribution of the draft report is our thinking on so-called structured giving vehicles, which enable donors to structure their giving over time.
One such vehicle, an ancillary fund, is a trust set up and maintained solely for the purpose of providing money, property or benefits to entities with DGR status.
These funds have been accounting for a large slice of philanthropic giving over time, so it is important to understand how they work and the policy tradeoffs that are involved in their design.
Giving into private and public ancillary funds has grown both in value (from $692 million in 2011-12 to $2.4 billion in 2020-21) and as a share of giving by individuals (donations to private ancillary funds have grown from 15% to 27% of individual giving).
As a result, ancillary funds have accumulated a pool of net assets that has grown from $4.6 billion in 2011-12 to $16.4 billion in 2020-21.
Although donations to an ancillary fund are tax deductible, it does not undertake charitable work itself.
Instead, it acts as an intermediary between donors and entities with DGR status that do undertake such work.
Ancillary funds encourage philanthropy by allowing donors to receive an upfront tax deduction for gifts that are distributed over time to entities with DGR status that undertake charitable work.
In the course of putting together our draft report, we found that hardly any good analytical thinking had gone into the tradeoffs involved in the design of the main policy lever that governments have to ensure that there is a reasonable and steady flow of money from ancillary funds to charities, so that it can be used to provide benefits for the community – the minimum distribution.
Guidelines made under the Taxation Administration Act 1953 (Cth) require funds to make a minimum distribution each financial year to type 1 DGRs. For private ancillary funds the minimum distribution is the greater of $11,000 or 5% of the fund’s net asset value.
One question is whether this minimum distribution rate is appropriate.
A key point in our draft report is that rules around distribution rates can potentially alter the timing of flows out of ancillary funds – in the draft report we noted that a higher minimum distribution rate will bring disbursements forward in time, with the opportunity cost that fewer funds are available for the future.
Charities with a certain purpose may prefer to receive funds earlier rather than later and others may prefer existing funds to build up over time to be deployed in later years.
And there is little information available on charities’ rate of time preference.
Given this, changing minimum distribution rates is likely to have both costs and benefits. In addition, changing distribution rates may alter incentives for people to donate, as well as the investment strategies of the funds themselves.
In the draft report, we discussed whether the current minimum distribution rate produces a reasonable flow of donations from the philanthropic sector to charities, but did not make a recommendation to raise or lower the rate.
Instead, we have sought further views on what minimum distribution rate would maximise the net benefits to the community, and the possible outcomes of a change to the minimum distribution rate.
Conclusion: the role of philanthropy
I will conclude with some reflections on the role of philanthropy.
Notwithstanding the case for government support, a major theme in the draft report is that government policy changes have their own limitations, and the philanthropic sector itself has an important role to play in shaping its own evolution over the years and decades ahead.
There is no doubt that government action has advantages in certain situations: it has big policy levers like tax and regulation.
But many proposals for government intervention could be replicated, at least in a partial sense, by philanthropy itself.
For example, throughout the inquiry we heard calls for governments to grant a tax deduction for costs incurred by volunteers – for example, a deduction for travel and other costs.
And there is no doubt that these costs can be significant and could deter some individuals from volunteering. But given the complexities, the integrity risks and the potential revenue cost, is such a change warranted? Again, it comes back to benefits and costs, about which we know very little.
During the public hearings I made the point that such a scheme could be replicated by an innovative philanthropist. A donor could say to a charity: I will give you a grant that explicitly covers the travel costs of your volunteers. The results of such a trial – the cost, whether it encouraged more volunteering, and so on – would be very interesting and informative for policy.
And remember, such a trial would not be without government support: as a result of the tax deduction available under our DGR system, the government – actually, other taxpayers – are shareholders or silent partners in billions of dollars’ worth of such programs each and every year.
Similarly, just as government and philanthropy can act alone to support giving, they can also work together to address complex social and environmental problems.
If government can engage with philanthropy in such a way as ‘crowd in’ funding for activities that government may not be able or willing to fund alone, then there would likely be clear benefits from such collaboration.
Conversely, philanthropy has an incentive to engage with government to leverage its ability to deliver programs at scale.
In light of these potential gains from cooperation, both government and philanthropy should consider how they can coordinate their respective contributions more effectively to enhance outcomes for the community, especially given the different characteristics of government and philanthropic funding.
The Commission is proposing, for example, that Australian, state, territory and local governments more actively consider how changes to policies and programs would affect volunteers.
We think that Governments should, for example, consider from the outset how major reforms (such as the NDIS) may affect the demand for – and supply of – volunteers (like in the disability sector), and what steps could be taken to facilitate or ‘crowd in’ volunteer contributions, rather than crowding them out.
The broader point is that philanthropy has important role to play, both in its own and in collaboration with government – it’s not just always about government action alone.
And it’s not just about the amount of giving, but also the way in which philanthropy is practiced – for example, more flexible or untied grants are likely to be worth more to a charity than a restricted one. The extent to which philanthropy evolves, changes its funding practices, looks at the way it innovates, and so on, will be important over the decades ahead.
Thank you for listening and I look forward to your questions.
