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The quest for small government comes at a cost to good government

The Coalition preaches that small government is best. But the reality is that government is not actually smaller under the Coalition — and what voters really want and need is good government.

The Coalition mantra is that business is always more efficient than the public sector. According to the Coalition it then follows that small government must be better than big government.

t the Coalition also knows that what the voters want is not so much small government, as good government. And for the voters, good government is defined as maintaining their access to essential services and economic and jobs growth.

The following examination of the Coalition’s record finds, however, that there is a tension between the pursuit of smaller government and the good government that the voters want.

Penny-pinching is not small government

The reality is that government is not smaller under the Coalition. Instead, even pre-Covid, the size of government under Morrison was bigger than it has ever been.

Thus, in 2018-19 total Australian government budget payments were 24.5 per cent of GDP. That is more than in the last year (2012-13) of the previous Labor government when those payments were only 23.9 per cent of GDP, and also more than in the last year of the Howard government (2006-07) when this proportion was only 23.3 per cent.

This evident failure of the Coalition to deliver on its core philosophy inevitably raises the question of why is government not smaller? The answer is that it is impossible to achieve smaller government without making big cuts to major programs.

However, the Coalition knows that people want and need the present government services. Furthermore, there is every reason to think that the demand for government services has a high income-elasticity— as people get richer their demand for government services, such as health, education and better roads, increases more than proportionately.

That is why one of the Coalition’s core promise is that it will maintain what it calls “essential services” and it is therefore unwilling to make the big policy decisions that would be needed to reduce budget outlays.

Instead, the Morrison government in its quest for smaller government has adopted a penny-pinching approach to providing public services. The consequence is that unfortunately many of these services that we rely on are now seriously underfunded, as the following examples show.

In response to the royal commission, the government did announce additional funding for aged care, but in typically penny-pinching style, that amount was significantly less than all the experts insist is needed if the recommendations of the royal commission are to be properly implemented.
Much the same is true for childcare, where the additional funding of $1.7 billion over three years, announced in the last budget, is insufficient to ensure that all those mothers who would like to work more have the incentive to do so. Instead, an alternative proposal, supported by the Business Council of Australia and many others, is estimated to cost an extra $2.5 billion, but offset by a $5.4 billion boost to annual gross domestic product (GDP) from additional workforce participation. While a more generous proposal by the Grattan Institute would have a $5 billion cost, offset by an annual $11 billion boost to GDP.
Disability services are clearly under-funded and that is why we have a royal commission that is likely to recommend additional funding for the National Disability Insurance Scheme (NDIS).
In the case of universities, in the budget the government recognised the need to provide more student places to support future economic growth, but research reported in The Conversation “showed that the total amount isn’t enough to provide subsidies for extra student places, let alone the extra 30,000 this year announced by the treasurer”. The conclusion from this research is that the government “would need to provide about $1.1 billion more in subsidy from 2021 to 2024 to honour the claims that it made to the public and the parliament”.
Although the funding for vocational education and training (VET) was restored in the last May budget, it is another example of too little too late. Over the four years from 2015 to 2019, the number of government-funded qualifications completed by new apprentices and trainees fell from 284,000 to 209,000, and this new additional support does not make up for past shortfalls.
Housing affordability is worsening dramatically, but the government has done almost nothing to address this problem. The modest extra assistance to first home buyers with a 5 per cent deposit, will further add to the extreme pressure on house prices. We need to increase the supply of social housing and increase rent assistance, but despite large Commonwealth funding of social housing in the past, the government now says this is a state responsibility, while doing nothing about rent assistance.
In April the government increased the JobSeeker payment by a miserable $4 a day — less than the price of a cup of coffee. JobSeeker is still only 65 per cent of the age pension rate and is clearly inadequate.
As the government reminds us, the international security situation has become much more volatile and uncertain. In these circumstances we should be increasing foreign aid to help build strong regional alliances, but foreigners don’t vote, and aid is therefore a soft target for savings. Accordingly, between 2011 and 2020 spending by the Australian government on foreign aid fell by 31 per cent in real terms, while overall global spending on foreign aid increased by 26 per cent in the same period.
The funding of government administration has been kept on a tight rein, with arbitrary “efficiency dividends” being imposed to reduce costs. Departmental expenses fell from 8.75 per cent of total government outlays in 2007-08 to 6.25 per cent in 2019-20, and public service performance seems to have suffered as a result.
In addition, the Morrison government has been prepared to pass some of its responsibilities to the states as an obvious way of saving its own budget. Quarantine is the most obvious recent example. But the leakage of the coronavirus from the often inadequate quarantine arrangements administered by the states has proved to be false economy, with the consequent lockdowns costing the nation a fortune.
Similarly, the Morrison government has passed to the states the responsibility for recompensing businesses and their employees who have lost income during the lockdowns. This may save the Commonwealth money, but now many recipients are still waiting for this assistance weeks later, whereas last year under the Commonwealth’s JobKeeper program they were recompensed almost immediately through the Australian Taxation Office, which was clearly much better able to deliver this assistance.

Staffing and small government

Given the evident failure of the Coalition government to achieve their objective of smaller government, as measured by the size of budget outlays, and despite under-funding many services, perhaps it is not surprising that the Coalition has sought to shift the debate to concentrate on the number of public servants employed.

Although why these staff numbers should matter to most people remains a mystery. What matters to most people is what something costs, not how many people are employed in producing the service.

Nevertheless, in its pursuit of small government, the Coalition has reintroduced staff ceilings that were previously abolished by the Hawke government and replaced by cash controls of total administrative expenditures. This “running cost” system allowed managers the freedom to choose the most efficient means of administering their departments within their budget ceiling.

Now, although the new system of staff ceilings is likely to lead to less efficient administration, it has achieved the government’s immediate objective of smaller public service staff numbers. These have fallen from a peak of 182,505 in 2011-12 to a low of 165,276 in 2017-18.

But offsetting this fall in permanent public service staff numbers, managers now make extensive use of contract labour hire and consultants to get around their staff ceilings, even though it costs more.

Thus, a parliamentary enquiry was told that labour hire companies supplying workers to understaffed federal agencies are receiving the equivalent of 20 per cent of the spending on public service wages. To give one such specific example, between 2013 and 2020, the number of permanent public servants employed by Services Australia fell by over 6,000, but in September 2020, Services Australia was engaging 12,184 outsourced non-public service workers.

Similarly, the total value of all consultancy contracts awarded in 2020-21 has increased massively to $539.2 million, compared to only $12.4 million in 2005-06. Furthermore, consultants’ advice is often influenced by their desire for another contract, rather than representing the frank and fearless professional advice that permanent public servants should supply.

Conclusion

The Morrison government’s penny-pinching approach to the financing of government services has not resulted in smaller government. As a share of GDP outlays are bigger than ever, but services are under-funded and consequently under-provided.

Public service staff numbers may have fallen, but these government workers have been replaced by contract and consultancy staff, and there has been a loss of public service capability.

In sum, the Coalition has not achieved smaller government. While, instead of good government the quality of service provision and government has clearly deteriorated.

Equally, this pathetic attempt to restrict the funding of essential government services has not led to stronger economic growth. In fact, compared to other similar developed economies, Australia is lagging well behind.

In the four years prior to the COVID-19 pandemic (2015 to 2019), Australia’s GDP per capita only increased at an annual average rate of 0.4 per cent, much less than the average of 1.6 per cent recorded by the other member countries of the OECD. In addition, this recent poor performance represents a major fall compared to the previous decade from 20o5 to 2014 when Australia’s GDP per capita increased at an annual average rate of 1.1 per cent.

Clearly jobs and growth have not been assisted by the Coalition’s quest for small government. Other developed economies manage to combine a better track record for economic growth with larger public sectors than Australia.

So if we want good government we need to spend more. A rough guess is that if instead of penny-pinching, the government were to deliver on its promise to adequately fund all essential services, then over the next two decades, the average annual rate of increase in total government payments in real terms would be at least half a percentage point higher than the Treasury is presently projecting.

That could then mean that by 2040-41, the size of government, as measured by the ratio of government payments to GDP, would be about 29.5 per cent of GDP, compared with the pre-pandemic ratio of 24.5 per cent of GDP in 2018-19. While this five percentage point increase is a significant increase, it is likely to be what will be necessary to meet the public demands, and it will still leave Australia with total government outlays (Commonwealth, state and local) that are no bigger as a share of GDP than the present OECD average today.

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