Ideas@TheCentre – The Centre for Independent Studies

Ideas@TheCentre

Ideas@TheCentre brings you ammunition for conversations around the table.  3 short articles from CIS researchers emailed every Friday on the issues of the week.

Cut wasteful spending, not just public servants

18 October 2013

alex-philipatos Following a long-standing pre-election commitment to cull Canberra's bureaucracy, the Coalition government will cut 12,000 Commonwealth public service positions. A slimmer and more efficient public service means a smaller burden on taxpayers, but the method employed to cut the bureaucracy is questionable.

These jobs will be shed via attrition rather than by targeted cuts to departments and programs, which means that any savings can be easily reversed and the government cannot control where the cuts fall.

In the 1990s, the Keating and Howard governments set about implementing large cuts to the Commonwealth public service. In 1993, the public service consisted of 143,000 ongoing employees, and by 1999, employees had been reduced to just over 100,000 – a 30% reduction. Though there was a concerted effort to reduce the size of government by the incoming Howard government, both his government and the Keating government achieved some public sector cuts by privatising select public assets.

From 2000, public sector employee numbers rose strongly throughout the remainder of the Howard years and the first term of the Labor government. It was not until 2009 that the rate of growth eased, quite possibly because of the renewed urgency to mend the state of the federal budget. By 2012, there were 154,000 ongoing employees in the Commonwealth public service.

The cuts made in the 1990s were much steeper and more targeted than those proposed by the current Coalition government.

Abbott's planned cuts to the public service represent just seven percent of its current size and there is no guarantee that the workers who leave hold positions the government wants to shed. Nor does it address the pressing productivity issues.

There are departments, agencies and programs that should be scrapped altogether. Some departments duplicate existing state equivalents and add to red tape. Others complete functions the government should not be involved in at all, such as Wine Australia, the government's wine marketing body.

Cutting by attrition addresses none of these issues. Instead it simply requires existing departments and agencies to operate with a slightly smaller workforce on a slightly tighter budget. These departments can easily expand and rehire workers if the government loses cost discipline.

A better approach to public sector reform is to focus on productivity, eliminating waste and improving delivery of the services the community really needs. By targeting unnecessary agencies and terminating wasteful programs, the Coalition can also make long-term inroads to the federal budget position and ensure that the savings will endure beyond the current cost cutting campaign.

Alexander Philipatos is a Policy Analyst at The Centre for Independent Studies.

Efficient markets in Nobel Prizes

18 October 2013

stephen-kirchner Remember the 2004 crash in Sydney house prices? Neither do I. But Robert Shiller, one of three co-recipients of this year's Nobel Prize in economics, certainly does. Writing in the Wall Street Journal in 2005, Shiller claimed that Sydney suffered 'a pretty sharp bursting of their bubble' on the strength of a 2.5% decline in real house prices the previous year.

This is an extraordinarily low threshold for declaring a burst asset price 'bubble'. No surprise then that Shiller sees 'bubbles' everywhere. He is consequently credited with having foreseen recent asset price busts, but with such a low 'bubble' threshold, it would be more surprising if he missed one.

Shiller is best known for demonstrating some long-run predictability in US equity returns, but the investment advice he has freely dispensed on this basis has been unfortunate to say the least. In December 1996, he declared that the Standard & Poor's 500 would show no real appreciation over the next 10 years and 'long run investors should stay out of the market for the next decade.' US equities saw annualised returns of 5.89% after inflation and the reinvestment of dividends over the following decade, including the bear market from 2000 to 2003.

Eugene Fama, a co-recipient of this year's Nobel, developed the efficient market hypothesis (EMH). Its central, but widely misunderstood, claim is that asset prices are generally informationally efficient and therefore not forecastable (although like Shiller, Fama also found some long-run predictability in asset prices). A boom and bust in asset prices is not inconsistent with the EMH. As John Cochrane notes, 'given the large average returns of the stock market, it would be inefficient if it did not crash occasionally.' Fama famously cancelled his subscription to The Economist 'because they use the word "bubble" three times on every page.'

Shiller argues that the EMH 'is one of the most remarkable errors in the history of economic thought.' Yet his own track record in calling markets speaks to its validity. While it is unlikely we will ever see a definitive empirical test of the EMH, many of Shiller's ideas about 'bubbles' are not testable at all. He freely admits that 'one cannot decisively prove the stock market has been irrational.' Unfortunately, the Nobel Prize will lend increased authority to that part of Shiller's work that is more assertion than science.

The economics Nobel is constituted on a different basis to the other Nobel prizes, leading some to question whether it is a 'real' Nobel. But as one laureate in economics is reported to have said, 'the prize money spends just as well as the other Nobels.'

Dr Stephen Kirchner is a Research Fellow at The Centre for Independent Studies.

Solving the looming crisis facing health system

18 October 2013

jeremy-sammut Devolution of public hospital management to the local level has been a policy goal articulated for many years by state and federal politicians. Regrettably, in practice, this has not been achieved despite periodic and repeated redesigns of governance arrangement.

The recent Rudd-Gillard government's national health reforms have placed Local Health and Hospital Districts (LHHDs) in charge of hospitals in designated regions under the nominal control of state government-appointed boards of directors. However, state health departments continue to function as 'system managers' with high levels of involvement in the operational affairs of hospitals because the financial risk for the operating budgets of public hospitals continues to be carried by state treasuries.

The 'command and control' public monopoly model of hospital governance and service delivery features a centralised, productivity-killing setting of policies. These include state-wide, union-negotiated industrial agreements (especially for nurses), which entrench poor work practices and are inimical to cost-effective management and efficient delivery of quality hospital care.

Alternative governance arrangements for public hospitals can address existing management problems and also mimic the key factors that international studies show account for better management and superior hospital performance.

The Foundation Trust hospital management and service provision model was introduced into the National Health Service (NHS) in England by the Blair Labor government.

Foundation Trusts combine true managerial independence with genuine financial accountability. Trust hospital boards of directors and CEOs are responsible for managing the hospital's budget, setting the employment terms and conditions of staff, and overseeing all other operational matters. Trusts have the right to borrow funds based on the hospital's capacity to repay out of earnings, and can retain and reinvest surpluses.

Adapting the Trust model to the Australian health system would also address major barriers to higher productivity by giving Trust hospital managers the authority to negotiate enterprise agreements with staff that take local conditions and financial realities into account. Workplace flexibility will eliminate restrictive and inappropriate 'one size fits all' industrial agreements, and facilitate the implementation of innovative ways of delivering cost-effective services – a process encouraged by the incentives created by financial accountability.

Over the last decade, expenditure on public hospitals has grown at nearly three times the rate of growth in national income. An ageing Australia will face problems funding its public hospital and other publicly funded health services if cost increases continue at current rates, and unless productivity improvements reduce the quantity of public resources consumed by public hospitals.

Improving the performance of public hospitals by placing them under the control of Trust-style boards of management – especially if 'corporatisation' is complemented by a broader microeconomic reform agenda encompassing competitive pricing and selective privatisations – would help control the escalating health expenditure and substantially contribute to the long-term sustainability of the health system.

Dr Jeremy Sammut is a Research Fellow at The Centre for Independent Studies. His report, with Professor Peter Phelan, Overcoming Governance and Cost Challenges for Australia's Public Hospitals was released on the 14 October 2013.