Saturday, 10 May 2014

Commission of Audit

Tuesday will bring the unveiling of the first Abbott-Hockey budget, so I thought I'd prepare by reading the report of the National Commission of Audit.  What a sorry dog's breakfast it is!

It's hardly a surprise that the report is a highly ideological affair.  Not only was it commissioned by an ideologically-driven government freshly elected to office, it is controlled by a hand-picked group of right-wing opinion-makers.  The Commission's chair, Tony Shepherd, was until recently President of the Business Council of Australia and its secretariat is headed by the Business Council's Director of Policy Peter Crone.  Other commissioners vary from politically committed right wingers to more moderate conservatives.  The commissioners are supported by a substantial team of officers from Treasury and Finance, but none from the operational departments whose programs they comment on with impunity.

What did surprise me was how careless and slipshod the whole thing is.  The title - Commission of Audit - is clearly a misnomer.  How many auditors have to confess early in their reports that their recommendations have not been properly costed?

The starting point for their deliberations is a set of predictions about government income and expenditure.  According to their projections, in the absence of policy change government expenses (overwhelmingly made up of direct service costs, not "red tape") will increase by 3.7% per year in real terms between 2016 and 2024.  This increase is driven by a number of factors, the most important of which is the ageing of the population.  This increase will see government spending increase from 25% to 26.5% of GDP.

Interestingly, their terms of reference don't include a brief to look closely at taxation.  Instead, they make some heroic and rather odd assumptions.  They assume that taxation receipts, currently running at a bit under 22% of GDP, will recover with economic growth and increase to about 24%.  After this, they assume these receipts will stay at that level because even though in the absence of policy change bracket creep will ensure receipts keep rising, governments will adjust rates to stop this happening.

Funnily enough a scenario in which actual (if rubbery) projections show steadily increasing expenditure while income is arbitrarily assumed to stay constant reveals increasing deficits.  This is what they call the "business as usual" scenario but like the name of the commission this is a misnomer because it builds in an assumed change in tax rates.  This view is reinforced as you read on, because Recommendation 1 of the report contains a set of proposed "fiscal rules" which include a provision that taxation not rise above 24% of GDP.  In other words, this percentage is not a "business as usual" assumption, it is part of their recommended set of reforms.

They then set out an alternative scenario - the "reform" scenario - in which various programs are trimmed to bring the budget back into surplus, while tax revenue is assumed to be the same as in the "business as usual" scenario.  Given their own admission that their recommendations are not properly costed, the detailed numbers can't be relied on, but as a general principle this is a question of primary school maths.  If income stays the same and spending is cut, the deficit will decrease and if you cut enough you will get a surplus.  We didn't need a high powered commission to tell us that.

The devil (and devil it truly is) is in the detail.  The largest part of the report is a breathtaking gallop through Commonwealth policy and Commonwealth-State relations.  The Commission stabs and slashes here and there in order to get the budget down to their recommended level, but in the process it reveals both its incoherence and its ignorance.

Incoherence is shown in their approach to the defence and foreign aid budgets.  Defence has been the subject of a promise by the incoming government to raise spending to 2% of GDP, while foreign aid has been working haltingly towards an internationally agreed target of 0.5% of GDP.  In both cases, the commission recommends that it would be better to define the outcomes sought and then set the appropriate budget figure to achieve these outcomes rather than rely on an arbitrary percentage.  This seems reasonable, but if it makes sense in the individual policy areas that make up the budget, why not for fiscal policy as a whole?  Why does the commission not take its own advice, define the policy objectives of government and then set a spending level that will achieve them?

Incoherence can also be seen in its approach to federation.  Without a lot of analysis, the commission recommends a quite radical re-writing of Commonwealth-State financial relations based on a strict interpretation of the constitution.  Areas of responsibility that are constitutionally assigned to the States should be managed and funded by them, not by the Commonwealth.  To pay for this, a portion of income taxing power should be handed back to the States.  They would be given the power to levy an income tax surcharge, with the Commonwealth proportionally decreasing its own income tax rates.  At the same time GST should be distributed to the States on a strictly per capita basis, with top-ups to poorer states paid as a separate grant.

Of course it would be too much to expect that they would apply this principle consistently.  In education and health, both State responsibilities in the constitution, they envisage an ongoing but reduced (and less costly) Commonwealth role and a streamlined reporting arrangement which cuts red tape.

It is hard to see how this will help achieve the commission's overall aim of reducing expenditure.  Their argument seems to be that streamlining accountability by delegating more responsibility reduces costs.  However by their own account the cost of administration is only a small proportion of the cost of government and savings in this field have only minimal impact on the bottom line.  At the same time, although their reforms include a major re-alignment of taxation arrangements, no attempt is made to build these into their financial projections - the "reform" scenario has identical revenue projections to the "business as usual" scenario.  Nor is there any analysis of what these changes might mean for State budgets.  Could it be that the commission is just recommending the deficit problem be shifted from the Commonwealth to the States, most of whom are already struggling with their own deficits?

Their boldness in making recommendations about individual portfolios is also quite stunning, given they had little input from anyone with expertise in these areas.  My own professional field of housing policy provides a good example.  Here they have applied the constitutional separation of responsibilities fairly strictly.  The Commonwealth, they say, should withdraw from all funding of affordable housing and homelessness, with their contribution restricted to paying rent assistance to low income Australians through the income support system.  Eligibility for these payments should be extended to tenants of State housing departments provided these departments shift to charging market rents.  Everything else should be left entirely to the States.

This set of recommendations sounds reasonable when you say it quickly, as the commissioners do.  Their analysis of housing policy is less than a page long.  Yet it advocates a wholesale reconstruction of the housing assistance and homelessness systems which have been built up jointly by State and Commonwealth governments since the second world war through a series of intergovernmental agreements.

The public housing system is not working well at the moment, a result of decades of bipartisan neglect at Commonwealth and State level.  State housing departments are facing huge financial challenges with falling rental income and rising maintenance costs, a result of increased targeting to very low income tenants and steady funding cuts.  At the same time, housing stress in the private market continues to increase.  How will the Commission's recommendations impact on these conditions?  Under the new arrangements, will the States be able to fix the chronic financial problems facing their public housing programs?  Will the changes improve the options available to households struggling in the private market?  The commissioners show no evidence of even being aware of these issues and provide no analysis of the impact of their recommendations on them.  Not their problem, I guess, since the constitution says it belongs to the States.

This slapdash approach is repeated across policy areas.  Health, education, social security, aged care, defence, aboriginal affairs, foreign aid, industry assistance, research and development - you name it, all get the same broad brush, the same superficially rational-sounding ignorance.

So, to sum up, the Commission of Audit admits to not properly costing its recommendations, so its numbers are relatively worthless.  Its approach to taxation is incoherent and disingenuous, building some of its recommendations in as if they are fait accompli while pretending other far-reaching tax changes will have no impact.  It recommends substantial transfers of responsibility to the States but does not include even the most rudimentary analysis of State finances.  It makes detailed recommendations about specific policy areas based on an ignorance so profound it is almost criminal.

The Commonwealth government would have got just as good advice - and it would have been a lot cheaper - by asking the Year Six class at Yarralumla Primary School.  Still, the money has now been spent and it's important to make efficient use of taxpayers' funds, so I would suggest the government recycle the copies of this report and its appendices into toilet paper for the Parliament House toilets.  At least that way we will get some value out of the exercise.

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