Introduction
¥ This report focuses mainly on the period since the present government assumed office in June 1998. It argues there would be significant benefits from a major shift in policy designed to increase the role of the private sector in the provision of ÒgovernmentÓ services. Yet little progress has been made even in implementing the purchaser/provider recommendations of the 1996 Audit Commission report. And policy changes should go beyond those;
¥ Queensland has been growing faster than other states but remains a clear fourth in per capita incomes, 19 per cent lower than in Western Australia and 12 per cent lower than in NSW and Victoria. Convergence with higher per capita incomes in those states has been slower than might have been expected given QueenslandÕs many attractions;
¥ A larger contribution by the private sector to total Queensland expenditure should help. Although that share of the total has increased from 76 to over 79 per cent in recent years, other states have moved in the same direction. QueenslandÕs private sector still makes a smaller relative contribution than in three states;
¥ It is in the interests of the Queensland government and the Queensland community for the private sector to have a larger relative role. The resultant increase in competition and choice would improve the quality and efficiency of existing government services. It would also help the stateÕs budget.
Developments in the Role of Government
¥ A larger private sector policy would be consistent with the declining size of government since the early 1990s in most OECD countries including Australia. Moreover, Australians have for many years been more accepting than Europeans of greater private sector involvement in education and health and other services traditionally provided by government. There is now no clear dividing line between what role the two sectors ÒshouldÓ perform;
¥ Various influences behind the relative decline in government include the increased capacity of individuals to manage their own affairs, greater recognition of the extent of the adverse effects of taxation, increased protection provided to individuals from a more competitive economy, the growing importance of private sector driven technological change, greater scepticism about the virtues of government financed services/ projects, and increased recognition of the private sectorÕs potential as an efficient supplier of most ÒgovernmentÓ services;
¥ In Australia almost bipartisan political agreement exists against increasing taxation to expand the size of government and COAG has agreed that the public sector needs to effect more competition-driven and regulatory-reducing reforms. Options for such reforms amongst state governments include privatisation with competition regulation, public/private partnerships and the contracting out and/or franchising of service provision. States could also provide overt support, both general and financial, to encourage greater direct private sector involvement in the provision of ÒgovernmentÓ services;
¥ Entrenched interests and traditionalists oppose such reforms partly because of distrust of private enterprises and their profit objectives and partly because they would reduce their political power. But in AustraliaÕs current competitive operating environment such opposition appears to have little substantive economic or social basis;
¥ Moreover, communities in all states are increasingly using private sector services competing with ÒgovernmentÓ services in, for example, education and hospitals. In Queensland over 30 per cent of students already attend non-government schools and 47 per cent of patients are treated in private hospitals. Some overseas countries allow public education money to be used at any school meeting minimum requirements;
¥ There is also widespread acceptance of the benefits from governments providing financial fields. For non-government schools federal and state grants now provide nearly 60 per cent of their income and for private hospitals 35 per cent of their income is derived from government.
Existing Roles of Government and Private Sector in Queensland
¥ While Queensland and other states have been slow to recognise the improved efficiency from services privatised in Victoria and from that stateÕs increased resort to public/private partnerships, there now appears to be an increasing willingness by governments to use private sector enterprises as providers of ÒgovernmentÓ services. The Queensland government has recently indicated it is favourably disposed to privatising a major part of the electricity industry and that it will evaluate $5.6 billion worth of potential public-private projects;
¥ Analysis of the expenditure components of Queensland gross state product indicates that since 1997-98 business investment has been the driving force behind the stateÕs growth and now constitutes about 75 per cent of total investment (excluding dwellings) in the state. The much faster growth in business investment than total public sector investment (3.5 times faster) raises questions as to the latterÕs adequacy;
¥ Over the same period private sector employment has also grown considerably faster than public sector employment (3.1 per cent pa compared to 1.8 per cent pa). However, the proportion of QueenslandÕs employment in the public sector is higher than the statesÕ average (equivalent to about 8,000 employees) and the public servicecomponent has
increased particularly strongly (3.4 per cent pa). Average earnings of public sector employees are about 3 per cent lower than the average for the states;
¥ Nearly 60 per cent of public sector employees are members of trade unions compared with 19 per cent for private employees;
¥ Total expenditure by QueenslandÕs general government sector (ie excluding public corporations and local government) is lower than the statesÕ average (about 5 per cent or $900 million on a comparison of like with like), although some items of spending are higher;
¥ This continues QueenslandÕs long standing policy of being a low tax state. The Grants CommissionÕs assessment for 2004-05 shows average tax rates about 14 per cent or $1,078 million below the statesÕ average. Following the replacement in 2000-01 of general revenue grants with stronger-growing GST revenue, Queensland along with other states has been able to reduce the burden of state taxes but that has, in turn, reduced the proportion of self-raised revenue to just over 50 per cent.
The Performance of the Queensland Economy
¥ Since 1997-98 QueenslandÕs much faster growth in population (2.2 per cent pa compared to 1.3 per cent pa) has been the most important immediate cause of its faster economic growth (5 per cent pa compared to 3.5 per cent pa for Australia). However, this favourable growth ÒgapÓ of 1.5 percentage points narrows to only 0.7 points in per capita terms;
¥ The relative slowness of per capita incomes to converge does notreflect higher proportions of retirees or a lower rate of participation in the workforce;
¥ It may, rather, reflect the stateÕs industry structure, which appears to be oriented more towards industries in which earnings of employees tend to be lower than average. For example, QueenslandÕs mining industry contributes a relatively modest proportion of production (5.4 per cent) particularly when compared with Western Australia (18 per cent). However, the downwards influences are in industries other than agriculture, which accounts for only about 4 per cent of total production;
¥ A policy of reducing the regulation of investment in higher income industries might help diminish the per capita income differences.
QueenslandÕs Budgetary Outlook
¥ Various recent decisions to increase budgetary expenditure, particularly in health, have almost certainly eliminated the operating surpluses of $140-250 million estimated for the three years 2006-07 to 2008-09 and possibly even the estimate of $718 million for the current year. While the stateÕs strong balance sheet would allow considerable borrowings to finance capital expenditure in the general government sector without having adverse effects on the AAA credit rating, it would be fiscally (and morally) responsible to return the budget to operating surpluses of around 1 per cent of GSP;
¥ However, the revenue projections in the state budget suggest that the state faces a major deterioration in its capacity to finance expenditure growth, let alone budget for operating surpluses. Thus projections out to 2008-09 suggest an increase in nominal terms of total revenue of only 4 per cent pa, much slower than the 7 per cent pa increase in GSP and also much slower than the 7 per cent pa growth in revenue from 1997-98 to 2005-06;
¥ The main reason for this development is the much slower projected growth in revenue from the GST. Thus, whereas QueenslandÕs GST receipts increased at 10.3 per cent pa from 2000-01 to 2005-06, they are now projected to increase at only about 4 per cent pa, due to an expected slower growth in national consumption expenditure and an expected reduction in QueenslandÕs share of GST revenues. This means that in 2008-09 Queensland will have about $2.7 billion less in revenue than if the previous GST growth rate had continued. In short, the GST ÒbonanzaÓ appears to be over;
¥ Even if the GST revenue projections by the federal treasury turn out to be ÒconservativeÓ, Queensland faces a period in which it will have much diminished capacity to finance expenditure growth. This reinforces the desirability of increasing the role of the private sector in the provision of ÒgovernmentÓ services.
How the Private SectorÕs Role Can Be Increased
¥ A competitive framework for the supply of ÒgovernmentÓ services provides the greater range of choices increasingly preferred in educated societies. This is reflected in their growing utilisation of privately supplied services even though they are subject to fees or charges while government services are not. The greater accountability and testing of suppliers in a market- oriented framework also helps explain this increased demand;
¥ The prospect for accountability testing of government provision of services might be enhanced, however, if Queensland re-established its upper house as a house of review;
¥ A more competitive framework would not mean a two-tier system in which lower standards of services are provided for those with low incomes or with disabilities of some form. Where appropriate, subsidies can be provided (and are already) to allow the setting of a certain standard and the private sector can compete for supply on that basis;
¥ A move towards a more competitive framework can take two main forms, viz. the purchaser/provider model recommended by the 1996 Audit Commission, including contracting out, and policies that specifically encourage the establishment/expansion of competing private sector services, including the replacement by them of government services;
¥ With the extensive assistance now provided by both federal and state governments to non- government schools, a liberalisation of state policies towards non-government schools has the potential to establish seriously competitive conditions as well as helping the budget. Liberalisations should include effecting a faster increase in state grants; making low interest loans available for capital expenditure; giving ready accreditation to new applicants; changing regulations to require only minimal curricula and to allow new schools to compete without taking account of other schools in the area; allowing Òfor profitÓ schools where profits are expendable only on the school; giving non-government school groups preference in areas where new schools are needed; rationalising the large number of under-utilised/under-sized government schools, with non-government schools invited to be part of the rationalization process; and announcing no further reductions to existing average student/teacher ratios in government schools;
¥ Analysis by Dr Mark Harrison (ÒEducation MattersÓ) indicates that a school education system operating under competitive conditions is likely to have greater involvement of parents and a strengthened role for families;
¥ The great increase in patient numbers and treatments in Queensland private hospitals since 1997-98 reflects the increased government assistance provided mainly through the federal health insurance rebate, their capacity to provide almost the full complex of treatments, their recognition by the Australian Council on Health Care Standards and by the general public as hospitals that generally perform better than public hospitals, and their lower average costs structures;
¥ A liberalisation of state policies towards private hospitals would also help both their expansion on a competitive basis and the state budget in circumstances where further significant increases in demand for additional hospital treatment are likely. Government policy changes should include an indication of general support for a further large expansion in private hospitals and more positive action to fulfill the statement in 2004 of a preparedness to establish a more cooperative relationship with such hospitals; an indication that a further reduction in public hospitals is anticipated (there was a reduction of 12 over the six years to 2003-04 and an increase of 21 in private hospitals); the establishment of a normal waiting time of 12 months for private (insured) patients wanting treatment in public hospitals even though they could readily be treated in private hospitals; and the offer of low interest loans to help fund the expansion of private hospitals or the establishment of new ones;
¥ As to public sector investment, notwithstanding the announced $55 billion planned ÒadditionalÓ infrastructure investment over 20 years, the budget projections provide for a fall in public sector investment over the next three years and it is difficult to identify what is ÒadditionalÓ in aggregate terms. With the rapid growth in business investment and
associated demands for increased infrastructure, this indicates the need for clarification of State policies on the role for investment by the private sector in areas where the Queensland government has traditionally provided or is currently providing most of the services;
¥ First, given the governmentÕs actual or foreshadowed involvement in specified individual projects with the private sector, and its announced evaluation of $5.6 billion of potential public-private partnerships, the government should make a general statement indicating such partnerships and/or contracting out will be used wherever practicable and efficient;
¥ Second, given the governmentÕs indication that it is favourably disposed to the privatisation of a major part of the electricity industry, it should make a similar general policy statement indicating that it favours selling most of the $22 billion of public corporation assets. In line with this, the Boston Consulting report on 24 April recommended sale of all electricity assets. However, while the Premier has agreed to the sale of electricity retailers, he has ruled out the sale of generation and transmission assets. The latter decision can be challenged, as a general policy of asset sales is well justified by the analysis by the Productivity Commission showing an average return on assets of only around 5 per cent (compared with the 9.5 per cent average cost of capital for companies). Allowing for the loss of dividends and tax equivalent payments, their sale should produce a net saving to the budget.
A Package of Lower Taxation and Regulation
¥ Notwithstanding the deterioration in the budgetary outlook, there is potential for a reduction in state taxes of between $1,000 and $1,500 million compared with estimated state tax revenue of nearly $7 billion in 2005-06. This would need to be spread over a period by, first, giving priority to a program of lower taxes over various items of what might be classified as Òmore marginalÓ expenditures and, second, by securing savings in government spending through an enhanced program of encouraging the private sector to assume responsibility for a significantly increased proportion of ÒgovernmentÓ services;
¥ Reductions in Òmore marginalÓ expenditure in favour of lower taxes might include reductions in petroleum subsidies and further reductions in concessional electricity tariffs; in well-above- average expenditure on Ògeneral public servicesÓ; in savings by the Service Delivery Commission (PremierÕs target of $100 million) from minimising duplication and inefficiencies such as those resulting from the government printer, centralised public works maintenance, and the use of unnecessary incentives designed to attract business investment to Queensland; in savings from sharply reducing the growth over five years in the number and average earnings of public service employees so as to make expenditures on employment consistent with the lower expected growth in revenue, and by amalgamating departments with similar functions;
¥ The sale of the major assets of public corporations would allow a reduction in gross state debt, producing net savings in recurrent budget expenditure (after allowing for the loss of dividends and tax equivalent payments);
¥ An enhanced program/policy for the private sector to provide an increased proportion of ÒgovernmentÓ services would also produce savings in addition to what might otherwise have occurred without such a program. If, for example, the proportion of students attending non- government schools could be lifted to 36 per cent by 2010-11, the net saving to the government from the operations of such schools could be about $1.9 billion in that year compared with $1.7 billion if the proportion increased to 32.7 per cent (and just over $1 billion in 2005 when it was 30.3 per cent). In the case of private hospitals, an enhanced program may be needed simply to maintain the high rate of increase in treatments at such hospitals, which are projected to save over $1.7 billion in 2009-10 compared with $1.4 billion in 2003-04. There would also be sale proceeds from closures of schools and hospitals no longer required in the public sector;
¥ The two approaches outlined would need to be complemented by a major program of reduced regulation of businesses. Many studies (including by the OECD) point to the adverse effects on business activity and, hence, on employment of excessive, poorly-designed and/or badly administered regulation. The large increase in legislation so far this decade (the highest amongst the states) signals the general problem and the governmentÕs ÒReview of Hot Spots for Regulatory ReformÓ in the Department of State Development, Trade and Innovation has not so far produced a comprehensive reform program;
¥ As with taxation reductions, it is a matter of determining priorities at the margin - is it better to get the benefits to the community as a whole from having lower taxation and regulation rather than having questionable benefits for (usually) only a few from expenditure or regulation that is marginal and debatable?
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