T30.05

Simon Cowan (ed.)Jeremy SammutJennifer BuckinghamRobert CarlingTrisha JhaAlexander Philipatos

Emergency Budget Repair Kit

IN EMERGENCY CUT SPENDING

National Library of Australia Cataloguing-in-Publication Data:

Emergency budget repair kit / Simon Cowan, editor.

9781922184221 (paperback)

Target30 ; T30.05.

Finance, Public--Australia--Accounting.Budget--Australia.Deficit financing--Australia.Australia--Appropriations and expenditures.

Other Authors/Contributors:Cowan, Simon, editor.Centre for Independent Studies (Australia), issuing body.

352.40994

CIS TARGET30 publications

TARGET30

T30.04 Robert Carling, Shrink Taxation by Shrinking Government! (2013)T30.03 Jeremy Sammut, Saving Medicare But NOT As We Know It (2013)T30.02 Andrew Baker, Tax-Welfare Churn and the Australian Welfare State (2013)T30.01 Simon Cowan, Towards Smaller Government and Future Prosperity (2013)

T30.05

Emergency Budget Repair Kit

Simon Cowan (ed.)Jeremy Sammut

Jennifer BuckinghamRobert Carling

Trisha JhaAlexander Philipatos

Contents

Introduction .......................................................................................................6

Budget Fix #1 Reform the Family Tax Benefit .....................................................8

Trisha Jha, Policy Analyst, Social Foundations Program

FamilyTaxBenefitPartBismiddle-classwelfare................................................8

RedesigningFamilyTaxBenefitPartA ..............................................................8

DubiousbenefitofSchoolkidsBonus .................................................................8

Savings(in2012–13) .....................................................................................9

Budget Fix #2: Shut down or sell SBS and ABC3 ...............................................10

Simon Cowan, TARGET30 Program Director

SBSduplicatesfreeInternetcontent ..............................................................10

OverlapbetweenSBSandABC ......................................................................10

ABCcoddleschildren ....................................................................................11

Savings(in2012–13) ...................................................................................11

Budget Fix #3: End corporate welfare ..............................................................12

Simon Cowan, TARGET30 Program Director

Directassistanceandtariffshurtbothconsumersandbusinesses .......................12

GovernmentfundingforR&D .........................................................................12

Alternativestocashgrantstosmallbusiness ...................................................13

Tariffrevenueandoffsettingeconomicgrowth .................................................13

Savings(in2011–12) ...................................................................................13

Budget Fix #4: Abolish the federal Department of Education ............................14

Jennifer Buckingham, Research Fellow, Social Foundations Program

Federalfundingforschoolsisarelativelyrecentdevelopment ............................14

DismantlefederalDepartmentofEducation .....................................................14

Savings(from2014–15) ...............................................................................15

Budget Fix #5: Stop rorting by providers and consumers in health ...................16

Jeremy Sammut, Research Fellow, Social Foundations Program

Changingdynamics ......................................................................................16

Savings(in2012–13) ...................................................................................17

Budget Fix #6: End duplication in agriculture ...................................................18

Alexander Philipatos, Policy Analyst, Economics Program

Duplicatingstateandterritoryequivalents ......................................................18

AustralianFisheriesManagementAuthority .....................................................19

AustralianPesticidesandVeterinaryMedicinesAuthority ...................................19

Savings(in2013–14) ...................................................................................19

Budget Fix #7: Bring back Medicare co-payments.............................................20

Jeremy Sammut, Research Fellow, Social Foundations Program

Open-endedandhighcost ............................................................................20

Hardlyradical ..............................................................................................20

Expandcost-sharing .....................................................................................21

Savings(in2012–13) ...................................................................................21

Budget Fix #8: Curb indexation of income support payments ...........................22

Robert Carling, Senior Fellow, Economics Program

Incomesupportpaymentsthelargestelementofspending ................................22

Inconsistentindexationarrangementsincreasegovernmentspending .................22

Savings(in2013–14) ...................................................................................23

Budget Fix #9: Stop paying for ineffective mental health rebates .....................24

Jeremy Sammut, Research Fellow, Social Foundations Program

Anewformofmiddle-classwelfare ................................................................24

Effectivenessofthescheme ..........................................................................25

Savings(in2012–13) ...................................................................................25

Endnotes ..........................................................................................................26

6

IntroductionIntherun-uptothe2013generalelection, leadingfigures in the Abbott government repeatedlydescribed the condition of the federal budget as anemergency.

There is now a budget emergency.

—Prime Minister Tony Abbott (then inopposition)1

[The] Economic Statement shows that the budget emergency is well and truly upon us.

—Treasurer Joe Hockey and Minister forTradeandInvestmentAndrewRobb(theninopposition)2

AndwhiletheCoalitionhastoneddownitsrhetoricsincecomingtooffice,thenewgovernmentclearlybelievesthebudgetisstillinabadshapeandinneedofimmediaterepair.

We first of all have to stop the haemorrhaging in the budget and we will make the decisions to stop the haemorrhaging in the budget.

—TreasurerJoeHockey3

We are dealing with the budget emergency ...

—TreasurerJoeHockey4

TheAugust2013EconomicStatementestimatesthat theUnderlyingCashBalance for the 2013–14Budgetwillbeadeficitof$30.1billionandthefiscalbalanceadeficitof$25.6billion.For2014–15,theUnderlyingCashBalanceisestimatedtobeadeficitof $24 billion and the fiscal balance a deficit of $22.2billion.

Whether this constitutes a budget emergencyis open to debate; however, it is clear there is a troubling trend of recurrent deficits and increasingdebt.

While the government has announced plans toaddressthebudgetdeficitviaacommissionofaudit,thecommissioncannotfixthebudgetproblemsintheshorttermbecausethegovernmenthascommittedto take the commission’s recommendations to anelectionbeforeimplementingthem.

Thecommissiondoeshaveavaluable roleasacircuitbreakertocompelpoliticianstore-examinetheroleofgovernmentinsociety.Ifthereispoliticalwillto follow its recommendations, such a commissioncouldmakeaseriousdifferencetotheeffectivenessandefficiencyofgovernmentinthelongterm.

Yet,havingrepeatedlytoldtheAustralianpeoplethereisabudgetemergency,theCoalitionmustnowactdecisivelyandquicklytoidentifyandresolvethecauseofAustralia’s budget problems. Proposing towaitthreeyearstoimplementsolutionsrunscontrarytotheappellationof‘budgetemergency.’

Source: Final Budget Outcome and Economic Statement 2012–13(August2013).6 Theseestimatesrepresent aroughguidetothesavingspossiblefromimplementingthesolutionssuggestedinthisreport.Modellingtheimpactofthesechangesisbeyondthescopeofthisreport.

Figure 1: Repairing the budget

7

Budget fix Annual savings ($millions)

#1ReformtheFamilyTaxBenefit 5,900

#2ShutdownorsellSBSandABC3 250–350

#3Endcorporatewelfare 8,000

#4AbolishthefederalDepartmentofEducation 130

#5Stoprortingbyprovidersandconsumersinhealth 720

#6EndduplicationinAgriculture† 650–1,220

#7BringbackMedicareco-payments 1,460

#8Curbindexationofincomesupportpayments 1,000–2,000

#9Stoppayingforineffectivementalhealthrebates 630

ESTIMATED TOTAL SAVINGS§ $18.7 billion–$20.4 billion

Table 1: Items in the Emergency Budget Repair Kit

† SomeoftheresearchprogramsrunbytheDepartmentofAgriculture,FisheriesandForestryareincluded inestimatesofindustryassistanceassessedinBudgetFix#3.Aspecificbreakdownofwhichprogramsareincludedandexcludedisnotpossiblebasedonpubliclyavailabledata—sotheexactoverlapisunclear. Theoverallsavingshavebeenreducedbybetween$80millionand$650milliontoaccountforthis.

§ Thesavingsidentifiedareestimatesofongoingannualsavingsbasedoneitherthemostrecentlyavailable data(2012–13or2011–12)orcurrentbudgetestimates—inallcases,thetimeperiodofthedataisindicated. One-offcostsassociatedwithimplementingsavingsmeasures(suchasredundancypackagesforworkersin thedepartmentsbeingclosed)arenotincludedinthecalculations.

Apartfromfollowinguponitsownstatedbeliefof a budget emergency, there is another reasonthegovernment should reduce its spending soonerratherthanlater.Regardlessofwhetheronebelievesthere is a short-term budget emergency, there isno doubt Australiamust prepare now for the grimfiscal challenges we will face in the years ahead,particularly from an ageing population and risinghealthcarecosts.

And the best way to ensure current budgetstabilityandfutureprosperityisbycuttingwastefuland ineffective government spending. Low-priorityspending programs and poorly targeted initiativesshouldbecutassoonaspractical.

The first four TARGET30 research reportsproposed savings measures along those lines toavoidthe long-termbudgetcrisis.5Thisfifthreportestimates the potential budgetary impact of someofthesavingspresentedinthepreviousTARGET30reportsandpresentsothersavingstoreturnAustraliatotheblackbeforethenextelection.Futurereportsinthisserieswilladdresssavingsmeasuresforstategovernmentsandotherpotentialavenuesofsavingsforthefederalgovernment.

Theevidence-basedstepsoutlinedinthisreportwillgenerateongoingsavingsofupto$20billionayear, repairing Australia’s bottom line in the shorttermandpreparingustomeettheloomingbudgetarychallengesoverthenextfewdecades.

Inaddition, reducingtheburdenofgovernmentwill unlock a host of economic and social benefits

suchasincreasedeconomicgrowthandlowertaxes,amorerobustcharitablesector,andgreaterpersonalresponsibility.

Thealternativestocuttingwastefulspendingaretoeitherraisetaxesorpileonevenmoredebt.

Raising taxes will put even greater pressureon household budgets, have a negative effect oneconomicgrowth,andcausedeadweight loss.Withgovernmentspendingacrossallthreetiersexceeding$500billionandgrowingrapidly,taxincreasesshouldonlybealastresort.

Continuing to run deficit budgets will saddlefuturegenerationswithhugedebtburdensandlowereconomic growth. Government debt should not beused to fund wasteful spending programs. Raidingthecountry’sfutureprosperitytopayforshort-termconsumptionisunconscionable.

The TARGET30 ’budget emergency’ solutions cover multiple areas of government spending andminimise the impact of the savings by spreadingthemacrossa largergroup.Theytarget ineffectiveprograms (such as industry assistance and theSchoolkidsBonus), expensiveprograms thataren’tgood value for money (such as Better Access toMentalHealth rebatesandGPManagementPlans),andareasofduplication(suchasSBSandthefederaldepartmentsofAgricultureandEducation).

Thisisnotanexhaustivelistofpotentialsavingsoptions. It is only the first step towards reformingthe relationship between Australians and theirgovernment.

8

Key recommendations• abolishFamilyTaxBenefitPartB

• redesignFamilyTaxBenefitPartAtoreducemiddle-classwelfareandinsulatelow-incomefamiliesfromtheabolitionofFamilyTaxBenefitPartB

• abolishtheSchoolkidsBonus

Family Tax Benefit Part B is middle-class welfareIncome tests allow families with a combined income of up to $176,390 to receive FTB Part B payments. These payments begin to taper at 20cents inthedollarwhenthesecondaryearner’sannualincomereaches$5,183.Soafamilyearningmorethan$150,000peryear largelyfromasingleincome could receive annual welfare payments ofmorethan$4,000fromFTBPartBalone.

Toputthisintocontext,thegrossincomeofthemedianAustralianhouseholdin2011was$64,168.14 Giventhegenerousincometests,somehouseholdsreceiving FTB Part B earn above-average incomes,andsoshouldbealowerpriorityforfinancialsupportfrom taxpayers than those on very low incomes.AbolishingFTBPartBwouldreducewelfaretothesemiddle-classgroupsandsavetaxpayers’money.

Reform the Family Tax Benefit

Budget Fix #1

Trisha JhaPolicyAnalyst,SocialFoundationsProgram

How Family Tax Benefit Parts A and B work

FTBPartBisaperfamilyfortnightlypaymentof$146.44wheretheyoungestchildisunder5 years, or $102.20 for familieswhere theyoungest is agedbetween5and18years.FTBPartBcanbepaidalongsideFTBPartA,whichisaperchildfortnightlypaymentofupto$224.7

ThemaximumrateofFTBPartA isavailableto familieswithahousehold incomeofup to$48,837.Incomecut-offthresholdsdifferanddepend on the number and age of children.8 FTBPartAcost$14.3billionin2012–13.9

FTBPartBispayabletosingleparentsearningup to $150,000 per year, and to couplefamilieswheretheprimaryearnermakesupto$150,000peryearandthesecondaryearnermakes up to $26,390 (if the youngest childisbelow5years)or$20,532(iftheyoungestchildisbetween5and18yearsold)ayear.10 In 2012–13, FTB Part B payments cost thegovernment$4.5billion.11

ManyfamilieswhoreceiveFTBPartBarealsoentitledtoFTBPartA—ofthetotalnumberof

FTBPartBrecipients,94%werealsoreceivingPartA.12SothesecondaryearnersinmostFTBPartBfamiliesfacehigheffectivemarginaltaxratescausedbythecumulativewithdrawalofbothpaymentsatcertainincomelevels.13

9

Savings (in 2012–13)In2012–13, thegovernment spent$4.5billiononFTBPartBpaymentsand$1.4billiononSchoolkidsBonuspayments.26Scrappingthesepaymentswouldsaveapproximately$5.9billionayearbasedon2012–13data.

Redesigning Family Tax Benefit Part AAbolishing FTB Part B will help reduce overallexpenditure, but it would also leave some low-incomefamiliesworseoff.RedesigningFTBPartAtoeasefinancialpressureonlow-incomefamilieswhilesimultaneouslyreducingmiddle-classlargessewouldaddresstheseconcerns.

WhiletheNationalCentreforSocialandEconomicModellingfoundthatonly$500millionwouldbesavedperyearifFTBPartBwasrestrictedtofamilieswithacombinedtaxableyearlyincomebelow$100,000,15 anunacceptably high proportion of expenditure onthatprogramgoestofamilieswithanincomeabovethemedian.

UnderthecurrentFTBPartAsystem,afamilycanhaveacombinedincomeof$234,860(dependingonthe number and age of children) before the entirebenefitiswithdrawn.16Thisismadepossiblebythesliding scale of income limits and a complex four-tieredsystemofamaximumrate,apartrate,abaserate,andataperedbaserate.17

As FTBPartA is designed to assist low incomefamilies, thesolution is tobetter targetFTBPartAtolow-incomefamiliesingenuineneed.IfFTBPartAwascutoffatauniformhousehold income levelsuch as themedian ($64,168),18 regardless of thenumberorageof children, then the savingsmadefrom introducing that cap could be redistributedto lower-income families to ensure a modicum offinancial security.Therearestill significantsavingsto bemade from abolishing FTB Part B, and trulyneedyfamilieswon’tbesubstantiallyworseoff.

Dubious benefit of Schoolkids BonusTheSchoolkidsBonusisacashpaymentforparentsofFTBPartA-eligibleprimaryandsecondaryschool-aged children paid at the beginning of the schoolsemester into a nominated account,19 notionally tohelp parents cover the additional costs of sendingtheir children to school (e.g. books anduniforms).

In 2013–14, parents of children in primary school will receive twopayments of $205per child,whileparentsofchildren insecondaryschoolwill receive$410perchild.Thesepaymentsarepaidinadditiontootherfamilypayments.20

The Schoolkids Bonus replaced the EducationTaxRefundin2012.Undertheoldsystem,familiescouldreceivearebatetocoverupto50%ofanFTBPart A recipient child’s educational expenses uponlodging a tax return. To claim the refund, parentshadtoprovideevidence in the formofreceipts forschooling-relatedexpenses.Theamountwascappedin2010–11at$397forprimaryschoolchildrenand$794forsecondaryschoolchildren.21

In 2011–12, when the Education Tax Refundwas abolished, the program cost $888 million.22 In2010–11,beforetherefundsystemwasextendedto cover school uniforms, it cost $659 million. In2012–13,thefirstyearoftheSchoolkidsBonus,the cost ballooned to $1.4 billion.23 So millions ofdollarsaregoingtofamilieswhopreviouslydidnotseetheneedtoclaimexpenses.

Althoughthepaymentistimedtobepaidatthebeginningoftheschoolyear,thereisnorequirementtospendthemoneyonschooling-relateditems.Thepaymentsimplyincreasesthedisposableincomeoffamiliesofschool-agedchildren:parentsreceivetwopaymentsforthesameexpense.

Furthermore,theexpendituremustbeseeninthecontext of an overall increase in the generosity offamilypaymentsoverthepastdecade.ExpenditureontheFTBsystemalonehasincreasedinrealtermsfrom $13.4 billion in 2001–0224 to $18.8 billion in2012–13.25 There is little to suggest the need foradditionalassistanceintheformofacashbonus.

TheSchoolkidsBonushaslittle,ifany,relationshipto the actual costs of schooling, so the Coalitiongovernment’scommitmenttoabolishthebonusisastepintherightdirection.

10

Broadcaster Television Radio Catch-up services Online platforms

ABC • 4stations(ABC1,ABC2,ABC3,ABCNews24)

• 1HDchannel

• 4nationalnetworks

• 60localstations

• 11digitalchannels

• 2internationalservices

ABCiView ABCOnline(newsandcurrentaffairs)

SBS • 3stations(SBS1,SBS2andNITV)

• 1HDchannel

• 3nationalstations

• 4digitalchannels

SBSonDemand SBSOnline(newsandcurrentaffairs)

Table 2: Content provided by Australian taxpayer-funded broadcasters

SBS duplicates free Internet contentAs per section 6(1) of the Special Broadcasting Service Act 1991 (Cth), the principal function of SBSis:

… to providemultilingual andmulticulturalradio and television services that inform,educateandentertainall Australians, and,indoingso, reflectAustralia’smulticulturalsociety.

While it could be argued that providing theseserviceswas a public good in the days before theInternet, multilingual and multicultural radio andtelevision programs are now available freely andingreatsupplyontheWeb.Inaddition,Australianmigrantcommunitiescanproducetheirowncontentonline at little cost (many already do). There is

also some multicultural content on commercialnetworks (more so on the ABC). So there is little rationale for government-providedmultilingual andmulticulturalcontent.

NationalIndigenousTelevision(NITV)ispossiblyan exception and should be moved from SBS,managedbytheABC,andbroadcastonABC3.

Overlap between SBS and ABCAustralia has two publicly funded broadcasters (ABCandSBS)thatoverlapsubstantiallyincontent.

The ABC runs a dedicated news channel, ABCNews24,with a nightlyworld news program (andinternational news broadcasts), that airs in depthlocalandnationalnewsthroughouttheday.

YetbothSBSandtheABCproducenightlynewsprograms (SBS also covers world news)—and air

Key recommendations• sell,incorporateordiscontinueSBSradioandtelevisionbroadcastsandInternetservices

• consolidateABC3withABC4Kidsintoamuchshorterprogrammingscheduleforchildrenand youngadults

Shut down or sell SBS and ABC3Simon Cowan TARGET30ProgramDirector

Budget Fix #2

11

current affairs shows in a forum style (Insight and Q&A); the ABC News 24 also runs a nightlycurrentaffairspanelshow(The Drum).BothSBSandABCshowsport,moviesanddocumentaries.

SBSattractsamuchgreatershareof televisionviewersintheeveningthaninthedaytime.Eveningsare also when SBS and ABC schedules overlapmost in type of content (news and current affairs,documentariesandseries).

With the massive expansion of free Internet-based radio services, there is little justification forso many government-funded radio stations. Muchof SBS’ broadcast radio is language-based newsservices,whichcanbeeasilyfoundonline.

This is not a critique of the quality of SBS’broadcasting but a suggestion that the channel’scontentcanbefoundelsewhereatlittleornocost,orissimilartotheABC’scontent.

Thereisnocogentreasontousetaxpayerfundstocompetewithothertaxpayer-fundedbroadcastersor duplicate content easily found elsewhere. Anyexisting or commissioned content that can be soldto commercial radio and television should be. TheABCcanpickupanyremainingcontentwhere it is

relevantorpreferabletoexistingABCprogramming(without increasing its budget). The rest should bediscontinued.

ABC coddles childrenTheABChastwodedicatedprogrammingschedulesfor children, ABC4Kids (for young children onABC2between6amand7pm)andABC3(forolderkids)—approximately 28 hours a day of under 18sprogramming.This isontopofchildren’sprogramson commercial networks, pay TV, and the glut offreeonlineeducationalandentertainmentmaterial.Thereisnoshortageofchildren’sprograms.

Thegovernmentitselfrecommendsthatchildren5oryoungershouldspendnomorethanonehouradaywatchingTV,andthatpeople18oryoungershould spend no more than two hours a day watching TV, online or playing video games.27 If the government is serious about its own recommendations, it should drastically reduce theamount of content it provides for under 18s byconsolidating the content provided on ABC3 andABC4Kids into a substantially shorter broadcastschedule(8hoursaday)andfreeupABC3forNITV.

Savings (in 2012–13)In2012–13,governmentcontributed$247.5milliontoSBS’budgetforordinaryannualservicesand$3million fornon-operatingexpenses,28andgave$158million toNITVoverfiveyears.ClosingSBSwillsaveapproximately$250millionayear.

While a precise budget for ABC4Kids and ABC3 is not published, the government allocates$533millionforABCTV,whichhasexpensesof$631.4million.ABC4KidsandABC3representapproximately one-third of ABC’s programming. Cutting 20 hours a day of children’s broadcastingwillsavetensofmillionsofdollars,maybeeven$100million,ayear.

Actual (ABC3)

Under 18recommended

Actual (ABC2)

Under 5’s recommended

Figure 2: ABC Children’s TV schedule versus government recommended viewing time

Source:DepartmentofHealth,‘PhysicalActivityGuidelines,’website.

1 hour

2 hours

13 hours

15 hours

12

Direct assistance and tariffs hurt both consumers and businessesTheProductivityCommission’sTradeandAssistanceReviewshowsoneof thenegative impactof tariffson business—tariff assistance of $7.9 billion iscounteractedbya$6.8billioninputpenalty(thecostoftariffsonimportspaidbyAustralianbusinesses).

Nor are the benefits spread evenly. Themanu- facturing sector (which employs 8% of theworkforce) receives a net benefit of $5.6 billion,whiletheconstruction industry(whichemploys9%oftheworkforce)paysanet lossof$1.54billion.31 Services industries (which employ more than three-quarters of the workforce) are net losers fromtariffprotectionofupto$4.5billion.

Tariffs raise theprices of a particular protectedgood, meaning consumers must pay more than theyotherwisewouldforthatparticulargood.

The negative impacts of direct assistance policies are also clear. Industry protection mustbepaid for;asconsumersandbusinessesarealsotaxpayers,theymustbearthecostsofprotection.

Nor does industry assistance guarantee jobprotection. The automotivemanufacturing industry(whichemploysfewerthan50,000people)receivesmorethan$1.1billionayearinassistance,yetFordAustralia has announced it will close its doors in2016; Holden Australia and Toyota Australia haveannounced more than 1,000 job cuts since the start of 2012; and key component suppliers suchasCMI,AutodomandAPVAutomotiveComponentshavegoneintoreceivership.

Government funding for R&DGovernmentgivesfundsforR&Ddirectlytocompanies(or via tax concessions) and indirectly through

organisationsliketheCommonwealthScientificandIndustrialResearchOrganisation(CSIRO).

Evidence on the effectiveness of such fundingof R&D is mixed. There is little evidence that taxcreditstofundresearchbycorporationssubstantiallyincrease total R&Dactivity, as the tax credit oftenpaysforresearchthatwouldhaveoccurredwithoutany incentives.32 In addition, most innovationoriginatesoverseas,

…98%oftheproductivityupliftinAustraliafrominnovationislikelytobetheresultofapplyingideas,oftensourcedfromindustry,thatwere first invented beyondAustralia’sborders.33

Key recommendations• abolishallcustomsdutiesand tariffs(otherthanthoseon excise-likegoods)

• endfinancialassistancetoindustry

End corporate welfare

Budget Fix #3

Simon Cowan TARGET30ProgramDirector

Who gets industry assistance?The Productivity Commission has twocategories of industry assistance: tariffs(taxes on imports) and direct budgetaryassistance(grants,subsidies,rebatesandtaxexpenditures).29Itdoesnot include indirectassistancesuchasprocurementpracticesorregulatorymeasureslikelicensingregimes.

Eightypercentofassistancegoes to threebroad areas30—30% to select industries(primarilymanufacturingindustries);28%tofacilitateR&D;and22%tosmallbusinesses.Theremaindergoestosector-widesupport,export assistance, and regional structuraladjustment.

13

The Productivity Commission also noted that‘the adequacy of existing program evaluation andgovernance arrangements is mixed, with somenotable shortcomings in business programs.’34 This indicates that direct government funding ofresearch by corporations is a poor investment oftaxpayerdollars.

Commentingonthe15RuralR&DCorporations,theProductivityCommissionsaid:

Thelevelofgovernmentsubsidiesforsomenarrower, industry-focused arrangementsis likely to crowd out private activity andproduce weaker external benefits outsidethesupportedruralindustry.35

Although specific analysis of the researchundertakenbybodiesliketheCSIROorCooperativeResearch Centres (CRCs) is beyond the scopeof this report, some of the research (e.g. into automotive manufacturing) undertaken by theseorganisations has a narrow, industry-dominatedfocusandmayrepresentasubsidytoindustry.

According to the Productivity Commission, thefunding for CSIRO is adequate and the fundingfor CRCs should be realigned to reduce ‘some of thelargeratesofsubsidytobusinesscollaborators.’

As the R&D tax concession alone exceeds $1 billion a year, $1 billion to $1.5 billion can besaved by diverting R&D expenditure away fromindustry-specificprograms.

Alternatives to cash grants to small businessIn Australia, there is significant bipartisan supportforsmallbusinessassistanceprograms36thatmirrorstrendsoverseas,particularlyintheUnitedStates.37

Assistanceisgivenintheformoftaxbreaksforsmall businesses, grant programs and subsidies,andexportdevelopmentprograms.Thejustificationfor these subsidies is that small businesses faceparticular challenges, generate lots of jobs, andencourage economic participation of women and minorities. Evidence supporting the merits oftheseclaimsis,atbest,equivocal.38Moreover,datafrom small businesses suggest these programsdon’t address the biggest obstacles to small businesssuccess.

The Australian Chamber of Commerce andIndustry (ACCI) conducts a quarterly survey of

small businesses, asking them to list the biggestimpedimentstogrowth.TheMaysurveyfoundthat:

Business Taxes and Government Chargescontinuedtobethenumberonebarrier tosmallbusinessinvestmentinMarchfortheninthsuccessivequarter.39

In addition, between August 2011 and May 2013, ‘Federal Government Regulations’ and‘State Government Regulations’ each featured in thetop10fewerthan7times,witheachcategorybeinginthetop5limitationsin5ofthe8quarters.

These factorswerecitedmuchmoreoften than a lack of access to debt, insufficient retained earnings, or skills shortages. Neither governmentadviceonrunningabusinessnortheabsenceoffreementoringserviceswasmentionedinthesurvey.

This suggests that rather than giving subsidiesthroughanunwieldybureaucracy,government candrivegrowthinindustrybyreducingitsownimpacton business. To the extent that small businessesbenefit from professional business advice, theseservicesareavailableinthemarket.

Tariff revenue and offsetting economic growthIn 2011–12, the federal government receivedapproximately $2.9 billion in tariff revenue (lesspotential deductions). As tariffs cause deadweightloss, they reduce total economic activity, whichdeprives the government of significant revenuein other areas (especially GST, corporate taxes,and income taxes). Dismantling the governmentapparatusthatadministersthetariffschemewouldalsogeneratesavings.

Withoutindustryassistancedistortingtheefficientallocationofresources,theeconomyasawholewillbelargerandbetteroffinthelongrun.Itisbeyondthescopeofthisreporttoassesswhethertheincreasesin GST, corporate taxes, and income taxes wouldoffsetthelossoftariffrevenue;however,sensitivityanalysis from the2013–14Budgetsuggests thata1%increaseinrealGDPwouldgenerate$3.9billionextrarevenueforthefederalgovernment.40Soonlya0.75%increaseinrealGDPisneededfromendingindustry assistance and abolishing all remainingtariffstoentirelyoffsetthelossoftariffrevenue,arealisticexpectationforthemediumterm.

Savings (in 2012–13)According to the Productivity Commission, the federal government spends $9.4 billion eachyear on budgetary industry assistance.41 Even if $1.4 billion in government R&D funding allocated to theCSIRO(whose totalgovernmentcontribution in2011–12wasapproximately$720 million) and similar organisations for non-industry dominated projects remains, and all other industry assistance is ended, government will still save at least $8 billion a year byendingcorporatewelfare.

14

Federal funding for schools is a relatively recent developmentBefore1964,therewasnodirectfederalfundingtoschoolsinthestates—onlytotheAustralianCapitalTerritory, the Northern Territory, and Australia’soverseasterritories.In1964,thefederalgovernmentbegan funding capital works in schools—sciencelaboratoriesinCatholicschoolsinitiallyandlibrariesandothercapitalworksfrom1969;recurrentfederalfunding tonon-governmentschoolswas introducedin 1970 and extended to government schools in1974. In recent decades, the federal Departmentof Education has devised andadministered education programs topromoteitsowneducationagenda.42

In the last10years inparticular,recurrent and capital funding fromthe federal government to schoolshas increasedmarkedly,both in realdollar terms and as a proportion ofall government (federal, state andterritory)spendingonschools.

Much of this new spending wason federal government-developed,targeted programs that supplementgeneralrecurrentandcapitalspending,such as the National Partnerships, theBuildingtheEducationRevolution(orBER,which isresponsible forthespendingspikein2009–10),andtheDigital Education programs. Theseprograms are now finished, and the

funding associated with them will be incorporatedinto the new Better Schools funding package from2014.

Dismantle the federal Department of EducationThemajority(60%)ofthefederaleducationbudgetis recurrent funding for non-government schools. Afurther30%isgrantstogovernmentschools.Theremaining 10% comprises a number of federallyadministered programs, some of which are due toendinthenextyearortwo,andsomeofwhichare

Jennifer BuckinghamResearchFellow,SocialFoundationsProgram

Abolish the federal Department of Education

Budget Fix #4

Key recommendations• terminateduplicativefederaleducationprograms

• administerremainingprogramsthroughotherfederaldepartments oragencies

Source:ABS(AustralianBureauofStatistics), Government Finance Statistics,Cat.No.5512.0(Canberra:ABS,variousyears).

Figure 3: Federal government outlays as a percentage of all government outlays on primary and secondary education, 1987–88 to 2011–12

15

funded through the budget forward estimates atleastto2016–17.

Nowthat theBetterSchoolsreformshavebeenfinalised, 90% of the federal Education budget—recurrent and capital funding to schools—can beadministered through Treasury. During the 2013election campaign, the Coalition had committedto reducing the accountability requirements of theBetter Schools policy, so this aspect of the policyshouldnotpreventatransferofadministration.

Many other ongoing programs administeredthroughthefederalDepartmentofEducationexceedthe role of federal government and can be ended.Thefewsignificantprograms(e.g.Abstudy)canbetransferredtootheragenciesordepartments.

Table 3 presents a proposal to dismantle thefederal Department of Education and associatedsavings.Onlyprogramsthatareendedarecalculatedasanet saving togovernment. Programs that aretransferred remain as a cost to government butwouldbeadministeredthroughadifferentbudget.

This is a conservative treatment of the budgetand allows completing big-ticket programs like

the construction of Trade Training Centres. So theidentified savings by ending existing budgetedprogramsarenot large inproportiontotheoverallschoolsbudget.Furthermore,someoftheprogramsare already being phased out over the budgetforecasts (e.g. Youth Support programs were funded at $127 million in 2012–13 but less than $4millionisbudgetedforthemin2016–17).

The unmeasured potential savings of such areform are substantial, however. Abolishing thefederal Department of Education would remove the opportunity and incentive to create newprograms to justify employing1,000 staffwhoarenotaccountabletoschoolsorteachers.

The idea of abolishing the federal Departmentof Education is not new. Australian researchersBrian Caldwell, Julie Novak, and Bronwyn Hinz,as well as US sociologist Charles Murray, have allargued for devolving education functions back to the states.43 As Caldwell points out, even though Canada does not have a federal Department ofEducation,itisahigh-performing,highequitycountry oninternationalassessments.

Savings (in 2012–13)On current budget estimates, abolishing the federal Department of Education would saveon average$130million each year. This underestimates future savings, however, given the historical precedent of an expanding role of the Commonwealth in government schools.This figure also does not include the reduced cost to state governments of complying with federalaccountabilityrequirements,whichwouldleadtosavingsatthestatelevel.

Budget measure Proposed action Saving2014–15 to 2016–17

Program 2.1 & 2.2 Recurrentfundingtoschools(ongoing)

TransfertoTreasury N/A

Program 2.3 SchoolSupport(ongoing)

TerminateallprogramsexceptIndigenousEducation,whichcouldbemovedtoanotherdepartmentordedicatedunit

$304million

Program 2.4 TradeTraining(terminating)

Transfermanagementofcontractsto schoolsorstates

N/A

Program 2.5 DigitalEducation(terminating)

Finishesin2013–14 N/A

Program 2.6 NP—TeacherQuality(terminating)

Finishes2014–15 N/A

Program 2.7 SupportforStudentswithDisabilities(ongoing)

PhasedintoBetterSchoolsequityfunding N/A

Program 2.8YouthSupport(ongoing)

TerminateallprogramsexceptresearchTransferresearchtoanotheragency(e.g.MCEECDYA)

$75million

Program 2.9StudentAssistance(ongoing)

Transferallfunctionstoanotherdepartment(e.g.DepartmentofHumanServices)

N/A

Program 2.10, 2.11, 2.12, 2.13NationalPartnerships

Finishes2012–13 N/A

Table 3: Federal Education programs to be terminated or transferred and associated savings

Source:DEEWR(DepartmentofEmployment,EducationandWorkplaceRelations),Portfolio Budget Statements 2013–14(Canberra:DEEWR).

16

Changing dynamicsHealth providers have boosted their incomes attaxpayers’ expense, and consumers have shiftedthecostofalliedhealthontogovernment.Doesthis high cost mean these items are achieving theirpurposeofmeetingunmetneedandfilling chroniccaregaps?

NotaccordingtoDrTonyWebber,theformerheadof the Professional Service Review, the watchdogbody responsible for policing the use and abuseof Medicare. In a scathing article published in theMedical Journal of AustraliainJanuary2012,WebberarguedthattheGPMPrebates:

…createdopportunities forabonanzaforsomepractices.Severalpractitioners…admittedthattheircorporateownershadabusinessplanbasedonadefinednumber of these items claimed everyweek, irrespective of clinical need.Medicare Australia is also aware thata significant proportion of theseplansarenotcarriedoutbyapatient’susualdoctor’spractice.Anecdotally,claimingfor clinically unnecessary GPMPs issignificantthroughoutAustralia.44

Key recommendations

• scraptheGeneralPracticeManagementPlans(GPMP) Medicareitems

• scrapTeamCareArrangements(TCA)Medicareitems

Stop rorting by providers and consumers in healthJeremy Sammut ResearchFellow,SocialFoundationsProgram

Budget Fix #5

The cost of ‘chronic’ care

Thecostof‘chronic’caretothefederalbudgethas exploded. In June 2005, the HowardgovernmentestablishednewMedicareitemsforchronicdiseasemanagementandalliedhealthservices.TheGPMPandTCAitemsallowedGPsto be paid Medicare rebates for developing‘careplans’andreferringpatientswithchronicconditionstoatleasttwoMedicare-fundedalliedhealth care services such as physiotherapists,dieticiansanddiabeteseducators.

The well-intentioned objective was to fill arecognised service gap in the health system.Since 1984, Medicare had provided allAustralianswithheavilysubsidised,open-ended,andon-demandaccesstoGPservices;however,Medicarehadlongfailedtoprovidesufferersofchronic conditions with affordable courses oftreatment, including clinically necessary carefrom awider range of non-medical providers.With these new items, patients with complexcareneedsbecameeligible foramaximumoffive allied health services per year under thesupervisionoftheirdoctor.

17

GPMP and TCA items

Services (million)

Rebates (nominal $million)

Rebates (constant $million)

Real growth (%)

2005–06 1.66 141.54 169.39 N/A

2006–07 2.58 200.87 225.43 33%

2007–08 3.38 266.79 299.42 33%

2008–09 4.53 358.50 396.70 32.5%

2009–10 5.50 433.23 464.88 17%

2010–11 6.59 528.02 547.18 17.5%

2011–12 7.89 638.53 653.79 19.5%

2012–13 8.95 722.48 722.48 10.5%

Table 4: GPMP and TCA services and rebates

Source:MedicareStatistics.

Savings (in 2012–13)TheGPMPandTCA rebateswere estimated to cost $247million over the four-year forwardestimates.46 At $1 billion, the full four-year cost was four times the original estimate (seeTable4).

Between2005–06and2012–13,theaverageannualreal(adjustedfor inflation)expendituregrowth rate was 23%, and the total real cost increased by 327%. Expenditure growth hasslowed in recent years, especially in 2012–13. This is probably due to the closure on 1December 2012 of theMedicare Chronic DiseaseDental Scheme,which required patients to get a GPMP to qualify for Medicare-funded dental services.47 However, annual average growthhas still been16% in the last four years, and in 2012–13, the total expenditure on GPMPandTCAitemswasmorethan$720million.AbolishingGPMPandTCAswouldsavethefederalgovernmentatleast$720millionayear.

WebberalsoarguedthattheintroductionofTCArebates:

… created a whole industry of alliedhealth practitioners and dentists who,through a TCA, draw on the publicpurse.UnderaTCA,there is incentivefordoctorstobepressuredtoprovidethe paperwork for ‘free’ podiatry,physiotherapy, psychology, and dentalcare, facilitated by computer systemsthat can generate the necessarypaperwork in minutes. The policy … has created perverse incentives forall parties involved. This is bleedingseveral hundred million dollars peryear as the policy intention is buried byinappropriateclaims.45

AlthoughGPMPandTCAsareusedappropriatelytoprovidenecessarycaretosomechronicpatients,these benefits come at an unacceptably highcost given the ensuing rorting. Webber proposesabolishing GPMP rebates and allowing doctorsto refer patients for TCAs on clinical grounds withoutpayment.

Implementing this recommendation wouldsavehalf abilliondollars but fail to guarantee the integrity of the TCA item. The same incentiveswould exist for non-chronic patients to demand TCA referrals, oftenat thepromptingof providers,and to shift the cost of allied health care to taxpayers. Unless some means can be devised to properly target government assistance to those whogenuinelyneedit,thebetterpolicyistoscrapGPMPandTCAitems.

18

Duplicating state and territory equivalentsTheagricultureportfoliocomprises:

• theDepartmentofAgriculture

• tworegulatoryagencies—AFMAandAPVMA

• onemarketingbody—WineAustralia

• sixresearchanddevelopmentagencies—cotton,fisheries,grains,grapeandwine, ruralindustries,andsugar

• theofficeoftheMinisterforAgriculture.

The agriculture portfolio exists to ‘developand implement policies and programs that ensureAustralia’sagricultural,fisheries, food,and forestryindustries remain competitive, profitable andsustainable.’48Inpractice,thismeans‘assistancetoprimaryproducers,forestry,fishing,landandwaterresources management, quarantine services andcontributions to research and development,’ with thelion’ssharegoingtoR&D.49

Each state, and the Northern Territory, has itsowndepartmentandportfolio taskedwith industryassistanceandgrantsforR&D.Forexample,Victoriahas a Department of Environment and PrimaryIndustries, while Queensland has a Department ofAgriculture,FisheriesandForestry.SouthAustralia’sDepartment of Primary Industries and Regionsstatesitis‘committedtothesustainableuseofthestate’sagriculture,wine,seafood,forestry,andfood

industries along with the provision of associatedresearch, regulation, policy development andbiosecurityimperatives.’50

The SA Department of Primary Industriesand Regions also has its own scientific research institute—the South Australian Research andDevelopment Institute (SARDI)—tasked withproviding ‘robust scientific solutions for primaryindustries.’ In effect, SARDI operates as SouthAustralia’s own industry-specific CommonwealthScientific and Industrial Research Organisation(CSIRO).

Key recommendations

• transfertheAustralianFisheriesManagementAuthority(AFMA)andtheAustralianPesticidesandVeterinaryMedicinesAuthority(APVMA)totheindustryportfolio

• abolishtheremainderofagricultureportfolio

End duplication in agricultureAlexander Philipatos PolicyAnalyst,EconomicsProgram

Budget Fix #6

Why subsidise research?The argument for government to subsidiseresearch is predicated on market failure—leftalone, themarket tends tounderinvest inR&D, leading to a slower rate of innovation—supposedlybecauseof inadequatecommercialincentives to research new technologies andmethods.

This premise is highly debatable, because ifbusinessescanreasonablyforeseecommercialbenefits in a research area, such as moredrought-resistant crops, there is a clearfinancial incentive to invest. The merits ofindustry assistance for R&D is also dealtwith inBudgetFix#3.

19

The federal government wastes more than $1billiondolingoutsubsidies toperform functionsalreadydonebythestatesandterritories,withtwonotableexceptionswithintheagricultureportfolio:

• AustralianFisheriesManagementAuthority(AFMA)

• AustralianPesticidesandVeterinaryMedicinesAuthority(APVMA)

Australian Fisheries Management AuthorityThe states or the Commonwealth manage thefishing waters depending on which governmenthas jurisdiction over the waters. The AFMA is responsible for managing fisheries underCommonwealth jurisdiction, combating illegalfishingactivitiesinAustralianwaters,andmanaging‘commercial fisheries from three nautical miles outtotheextentoftheAustralianFishingZone.’51

ItisappropriatethattheCommonwealthgovernandregulatetheuseofthewatersunderitscontrol,as do the states. Hence, the AFMA ought to be

retained as it performs a distinct function that cannot(orshouldnot)beperformedbythestates.

Australian Pesticides and Veterinary Medicines AuthorityThe APVMA is the statutory authority responsible for registeringpesticidesandveterinarymedicines,and regulating them up to and including retailsale.52Before1993,thesefunctionswereperformedby individual states and territories. The federalgovernment,withthecooperationofthestatesandterritories, took over this responsibility to create asimplified,uniformsystem.Asstatesandterritoriesno longer fulfil this function, this is a necessaryagencyofthefederalgovernment.

These two agencies can be transferred tothe Department of Industry, and their regularappropriations maintained. The Department ofAgriculture, the six agencies devoted to R&D, themarketing body, and the office of the Minister forAgriculture can then be eliminated, including thetaxesleviedonindustrytopayforthesubsidies.

Savings (in 2012–13)Theagricultureportfoliowillconsume$2.2billionin2013–14,accordingtotheportfoliobudgetstatement.53Roughly$406.3millionisraisedbyleviesimposedonindustryaswellaslicenceandregistrationfees,buttherest(about$1.8billion)comesfrombudgetappropriations.Thetworegulatoryagenciestogetherspend$28.3millionandraise$4.3millionfromlicenceandregistrationfees.

Abolishing the Department of Agriculture, the six R&D agencies, and Wine Australia (themarketingbody)wouldalsoentailabolishingvarious taxes imposedonbusinesses that fundpartoftheportfolio’sexpenditure.

AbolishingtheportfolioandshiftingthetworegulatoryagenciestotheDepartmentofIndustrywould save the federal government $1.7 billion in spending, and cost $403.9million in taxreceiptsforegone.Alltogether,thefederalbudgetwouldbereducedby$1.3billionperyear.

20

Open-ended and high costSince Medicare’s inception in 1984, the federalgovernment has provided all Australians with open-ended,on-demandaccesstomedicalservicesthroughtheMedicalBenefitsScheme(MBS).Attheswipe of their Medicare card, consumers receive‘free’ or highly subsidised non-hospital care from GPs and other specialists, including pathology,diagnosticandoptometryservices.Currently,morethan three-quarters of all services for which MBSbenefits are paid are ‘bulk billed’ and paid for in fullbythegovernment,withnopatientco-payment orout-of-pocketchargeslevied.54

The lack of clear and consistent price signalsaccounts for the high and ever-escalating cost of the MBS.55 Health insurance schemes such asMedicare that permit health care to be consumedat no direct cost to patients encourage overuse.Exposing patients to the real cost of health care hasbeenshown(bythefamousRANDexperiments)to deter unnecessary use of services with no adverse affects on health outcomes.56 As the Grattan Institute has shown, the rising cost of health to the federal budget in the last decadehas been driven by an increase in the volume of services used due to people ‘seeing doctors moreoften,havingmoretests.’57

The need for people to make relatively smalland affordable contributions towards the cost oftheirhealthcaretocurbstronggrowthinspending

on theMBSwasrecognisedwithin thefirstdecadeof Medicare’s existence. In November 1991, the Hawke government undertook the first majorhealth reform since it founded Medicare, when a$2.50co-paymentforGPserviceswasestablished.Pensioners and other low-income concession-cardholderswereexemptfromthisco-payment.However,these protections did not satisfy the left wing of the Labor Party. The co-payment regime operated for only three months, and was scrapped by the newLaborPrimeMinister,PaulKeating,inreturnforthesupportofmembersoftheLeftinthesuccessfulleadership tussle that ousted BobHawke as primeministerinDecember1991.

Hardly radicalGood, bipartisan health policy (the Coalition supported the co-payment arrangements) wassacrificedforthesakeofpoliticalexpediency.

As former ANU economist and now federal Labor MP, Andrew Leigh, argued in 2003, theHawke government got it right when it created the ‘ideal model’ and ‘perfect co-payment system.’ The ‘small co-payment,’ he argued, was‘not enough to put a dent in your weekly budget, butenoughtomakeyouthinktwicebeforeyoucallthe doc.’ Moreover, the idea was ‘hardly radical,’with a roll call of European social democratic countries with publicly funded health systems(from Greece to Sweden) charging co-payments.

Key recommendation• introduceaco-paymentof$5forMedicarefundedservices

Bring back Medicare co-payments

Budget Fix #7

Jeremy Sammut ResearchFellow,SocialFoundationsProgram

21

Leigh urged the Howard government to ‘deterfrivolousGPvisits’byconverting the1991schemeinto today’s money, and implored the Coalitionto go further than Labor had by ensuring that co-paymentswerepaidbyall,withnoexemptionsforspecialgroups,includingpensioners.58

The Abbott government should heed Leigh’sadvice.Adjustedfor inflation,the1991compulsoryco-payment in today’s money would be $4.26. There clearly is scope for increasing the out-of-pocket cost for accessingMBS services, given thatthevalueoftheupdatedco-paymentislessthanthecost of a Hamburger. Doubling the co-payment toaroundfigureof$5isnotunreasonable(especiallyconsidering that the original Hawke co-payment was planned to be $3.50, which is $6 in today’smoney, and only was lowered to $2.50 to satisfycaucuscritics).

Expand cost-sharingNor is it unreasonable to expand the range ofservicestowhichtheco-paymentapplies.Overthepast 20 years, technological innovations, increasedavailability, defensive medical practice, and risingconsumer expectations have led to substantial

increases in diagnostic and other investigatoryservices. Since 1994, per capita use of pathologyservices has increased by 100% and of diagnosticimaging by 68%, compared to a 5% increase inGP services and an 18% increase in specialistconsultations.59 Cost-conscious use of pathologyand diagnostic tests, including optometry, shouldbe encouraged by implementing cost-sharingarrangements in these segments of the MBS,particularlysinceall threeserviceshavehighratesofbulkbilling(87%,75%and99%respectively).60

There is no need for pensioners (who haveenjoyed substantial real growth in the value of their pension entitlements in recent times) andother welfare recipients to receive self-defeatingbenefittop-upstocompensatefortheadditionalco-paymentcosts.Thepointofco-paymentsistotreatmedicalcareasanordinarylivingexpenseforwhich self-provision should be made within householdbudgets.TheMedicareSafetyNetisalreadyinplaceto protect all individuals and families that incurexcessive out-of-pocket charges for out-of-hospitalservices in any calendar year with an extended,means-tested safety net available for concession-cardholdersandFamilyTaxBenefitArecipients.61

Type of service # Services (million) Benefit ($million) Saving with $5 co-payment ($million)

GP 115.51 4,908.06 577.55

Specialists 26.60 1,982.61 133.03

Pathologytests 120.62 2,377.70 603.12

Diagnostictests 21.39 2,702.75 106.96

Optometry 7.51 367.02 37.56

Total 291.64 12,338.16 1,458.24

Savings (in 2012–13)Charginga$5co-paymentforGPandotherspecialistcare,pathology,diagnosticandoptometrytests, combinedwithacorresponding$5 reduction inMBSrebates for theseservices,wouldsave the federal government at least $1.4 billion per annumbased on the benefits paid byMedicare in 2012–13 (see Table 5). The co-payment and rebate reduction would apply to more than four-fifths of the 343 million MBS-funded services received in 2012–13, whichaccountedforapproximatelytwo-thirdsofthe$18billiontotalcostoftheMBS.Theestimatedexpenditure savingsare conservative,andgreater reductions canbeexpectedbasedon theimpact that price signals are designed to have on overuse. The windfall savings generated by more appropriate usage could be substantial as the entire cost of rebated services will nolongerbechargedtothefederalbudget.

Table 5: Select MBS services, benefits and co-payment savings, 2012–13

Source:MedicareStatistics.

22

Income support payments the largest element of spendingThelargestsingletypeofpaymentfromthefederalbudget is for income support, totalling more than$100 billion in 2013–14. This includes pensions(age, disability and veterans), allowances for theunemployed and students, family benefits, andsupportforcarersofthedisabledandsomeparents.

Income support looms large in governmentspending,comprisingmorethan25%ofthefederalbudgetand20%of theentiregeneralgovernmentsector, including state and local government. Thefuture growth of these payments will be a majorfactorinthegrowthofoverallgovernmentspending.

Inconsistent indexation arrangements increase government spendingThe growth of income support payments willdepend on growth in eligible populations, changesin eligibility criteria, and increases in rates ofpensionsandallowances.Thisfixfocusesoncurbingincreasesinratesofpensionsandallowances.Rates

ofpaymentareautomatically indexed. Inaddition,there have been discretionary above-indexationincreases in pensions and allowances, such asthe large increase in pensions in 2009, which arecosting more than $3 billion a year. Government deliberately overcompensated pensioners andother beneficiaries for the impact of the GST (in2000)andthecarbontax(in2012)onthecostofliving. There have therefore been substantial real increases,particularlyinpensions,inrecentyears.

The indexation arrangements are complex, butin general, pensions are indexed to male averageweekly earnings, whereas other payments areindexedtotheconsumerpriceindex(CPI).Normally,average weekly earnings grow faster than the CPI—the former by about 4% a year and thelatter by about 2.5%. Indexing pensions towagesalmostguaranteesautomaticannualrealincreases, whetherthebudgetcanaffordthemornot.

The practice has not always been to index income support payments. Indexation is a by-product of the high inflation era of the 1970sand 1980s. Before indexation, adjustments were

Key recommendations• curbthegrowthofincomesupportpaymentsstemmingfromindexation

• OptionA:retainindexationbut indexpensionstotheCPIrather than(fastergrowing)averageweeklyearnings

• OptionB:freezecurrentrates ofpaymentforaperiodandthenresumeindexationwithoutcatch-upforthefreeze

Curb indexation of income support payments

Budget Fix #8

Robert Carling SeniorFellow,EconomicsProgram

23

discretionary and depended on what the budgetcould afford each year. Indexation has reduced thegovernment’scontrolofyear-to-yearexpendituregrowth. Making all increases discretionary wouldrestoresomeof that controlandallow the levelofexpenditureonincomesupporttobebetterattunedtotheoverallconstraintsonbudgetaryexpenditures.

Othercountrieshavemodifiedindexationpoliciestoexercisebettercontrolovergrowthofgovernmentspending.Forexample,inrecentyearsNewZealandhas stopped indexing some cash benefits andtightened eligibility rules. These measures haveresultedinanabsolutereductioninnominaloutlaysonthebenefitsprogramsinquestion.

Savings (in 2012–13)OptionA,whichwouldchangeindexationofpensionsfromaverageweeklyearningstotheCPI,isamodestmeasure thatwould saveapproximately$1billion in thefirstyearand thenanadditional$1billionayearforaslongasthepolicyiscontinued(forexample,$5billionayearafterfiveyears).

OptionBgoesfurtherbysuspendingallindexationtosaveapproximately$3.5billionpermanentlyforaone-yearfreeze.

AcombinationofoptionsAandBwouldsave$3.5billioninthefirstyear,$4.5billioninthesecondyear,andthenanadditional$1billionayear(to$7.5billionayearafterthefifthyear).

The savings from scrapping indexation permanently are impossible to quantify because it is notpossibletopredictthesizeofthediscretionaryincreasesthatwouldreplaceindexation.

24

A new form of middle-class welfareDefendersofBetterAccesstoMentalHealthServicesargue that the high cost reflects increased useof mental health services, and that the outlay isjustifiedbecause treatment rates formental illnesshave increased.62 Critics argue that the benefitsare overstated. Rather than help those who needthe greatest support to access treatment, themain effect has been to exacerbate traditionalsocial and regional inequalities in mental health serviceprovision.63

The 2011 evaluation commissioned by the federal government showed that people living inurban and well-off suburbs disproportionately useBetterAccessservices,withfarlowerratesofuptakein remote and socially disadvantaged areas.64 Aspointedoutby the leadingcriticsofBetterAccess,mentalhealthexpertsSebastianRosenbergandIanHickie,Queenslanders receive clinical psychologicalservices at half the rate of Tasmanians, while the ACT accounts for as many clinical psychologistrebatesasthewholeofNSW.65

Theskewedpatternsofuseby thewell-offandwell-provided for led Neil Cole, a former memberof theNational AdvisoryCouncil onMentalHealth,toconcludethatBetterAccesshaschieflyoperatedas ‘middleclasswelfaremasqueradingasamentalhealth scheme.’66 It has involved considerabletransfer of costs from individualswho could affordto pay for their own treatment to taxpayers. Theevaluation found that approximately half of all users were not accessing mental health services

for the first time, meaning that a substantialnumber of users had been accessing and wouldhave continued to access non-Medicare fundedmentalhealthcarewithoutBetterAccess.67 Thisalsoimpliesthatprovidersofpsychologicalserviceshavegreatly increased their incomes by claiming BetterAccess rebates while charging a co-payment, with bulk-billing rates forpsychological therapyservicesand focused psychological strategies around half thatofMedicare-fundedGPservices.68

Key recommendation• stopprovidingrebatesundertheBetterAccesstoMentalHealthServicesscheme

Stop paying for ineffective mental health rebates

Budget Fix #9

Jeremy Sammut ResearchFellow,SocialFoundationsProgram

Expensive and inequitable On1November2006,theHowardgovernmentestablishedtheBetterAccesstoMentalHealthServicesinitiative.

NewMedicare itemswere created to increaseaccess toprimarycarementalhealthservicesforpatientssufferingfrom‘common’andoftenuntreatedmentaldisorderssuchasdepressionand anxiety that require short-term episodes ofcare.

Similar to the General Practice ManagementPlans (GPMP) and Team Care Arrangements(TCA) items, GPs were paid a rebate to planandcoordinatethecareofpatients,whocouldfor the first time be referred to Medicare-funded clinical psychologists and otherallied mental health workers for specialised psychologicalservices.

25

Savings (in 2012–13)TheDepartmentofHealthandAgeing (DHA)estimated thatBetterAccess itemswould cost $538 million over four years.71 The cost blew out from the start and far exceeded initial estimates,withtheactualfour-yearcosttotallingmorethan$2billion(seeTable6).

Between2007–08and2012–13,theaverageannualreal(adjustedfor inflation)expendituregrowth rate was 12%; total expenditure increased by 73% in real terms over the period. Predicted continued cost explosions to at least $4 billion over five years led the Gillard government to introduce reforms in the 2011 Budget that lowered payments to GPs for drawing up care plans and reduced the number of rebates available for psychological consultationsfromamaximumof12to10inacalendaryear.72Theserelativelyminorchangeshavebeeneffective in loweringgrowthincosts insubsequentyears.However,thetotalcostof Better Access rebates in 2012–13waswell over half a billion dollars ($630million), butthe fundamental problems with this expensive initiative remain unaddressed. Scrapping theserebateswouldthereforesave$630millionayear.

Effectiveness of the schemeThisisnottosayBetterAccesshasnobenefits.Ithasincreasedtheaccesstomentalhealthservicesacrossall sections of the community, including in sociallyand geographically disadvantaged areas. But thisdesirable outcome could have been achieved (andstillcanbe)atafarlowercostbyprovidingtargetedandmore cost-effective support to assist the trulydisadvantaged and build capacity in underservicedcountryandlowsocioeconomicstatusregions.69

Increasing the access to mental health care inrelativelyadvantagedareasisalsoaquestionableuse

ofscarcepublicresources,givencompetingprioritiesinmentalhealth.BetterAccessisnotandwasneverintendedtobeusedtotreatpatientswithsevereandpersistent mental illness. These almost universallylow-income patients rely on state government-runpublicmentalhealthservicesthatstruggletoprovideadequatecareduetoinadequatefunding.Afurtherreason for scrapping Better Access is there is noevidence thatearly intervention treatmentservicesdelivered through Medicare has reduced rates ofacuteandchronicmentalillnessoreasedtheloadonthepublicmentalhealthsystem.70

Table 6: Better access to mental health services and rebates

Source:MedicareStatistics.

GP, CP, PTS and FPS items*

Services ($million)

Rebates (nominal $million)

Rebates (constant $million)

Real growth (%)

2007–08 3.24 325.06 364.80 N/A

2008–09 4.28 434.43 466.17 28%

2009–10 5.02 515.26 552.91 18.5%

2010–11 5.75 600.15 621.93 12.5%

2011–12 5.90 589.23 603.31 -3%

2012–13 6.42 630.93 630.93 4.5%

*GeneralPractice(GP),ConsultantPsychiatrist(CP),PsychologicalTherapyServices(PTS),andFocusedPsychologicalStrategies(FPS).

26

Endnotes1. TonyAbbott,‘Budgetaddressinreply’(16May

2013).

2. JoeHockeyandAndrewRobb,‘SameoldLabor:Moretaxes,moredebtandmorebrokenpromises,’jointmediarelease(2August2013).

3. JoeHockey,transcriptofaninterviewonAustralian Agenda,SkyNews(13October2013).

4. JoeHockey,The Task Ahead,addresstoTheCentreforIndependentStudies(8November2013).

5. RobertCarling,Shrink Taxation by Shrinking Government!T30.04(Sydney:TheCentreforIndependentStudies,2013),JeremySammut,Saving Medicare But NOT As We Know It,T30.03(Sydney:TheCentreforIndependentStudies,2013),AndrewBaker,Tax Welfare Churn and the Australian Welfare State,T30.02(Sydney:TheCentreforIndependentStudies,2013),SimonCowan(ed.),TARGET30: Towards Smaller Government and Future Prosperity,T30.01(Sydney:TheCentreforIndependentStudies,2013).

6. GovernmentofAustralia,Appendix B: Historical Australian Government Data,FinalBudgetOutcome2012–13;GovernmentofAustralia, Fiscal Outlook,EconomicStatement(August2013).

7. DHS(DepartmentofHumanServices), A Guide to Australian Government Payments(Canberra:DHS,July2013),2.

8. DHS(DepartmentofHumanServices), A Guide to Australian Government Payments(Canberra:DHS,July2013),asabove,3.

9. FaHCSIA(DepartmentofFamilies,Housing,CommunityServicesandIndigenousAffairs),Portfolio Budget Statements 2013–14(Canberra:FaHCSIA,2012),48.

10.DHS(DepartmentofHumanServices),A Guide to Australian Government Payments,asabove,3.

11.FaHCSIA(DepartmentofFamilies,Housing,CommunityServicesandIndigenousAffairs),Portfolio Budget Statements 2013–14,asabove.

12.FaHCSIA(DepartmentofFamilies,Housing,CommunityServicesandIndigenousAffairs),Income Support Customers: A Statistical Overview 2011(Canberra:FaHCSIA,2012),65.

13.Treasury,Australia’s Future Tax System(Canberra:Treasury,2009),583.

14.ABS(AustralianBureauofStatistics),‘2011CensusQuickstats,’website.

15.PatriciaKarvelas,‘Familytaxripeforbudgetaxe,NATSEMmodellingfinds,’The Australian(28February2013).

16.DHS(DepartmentofHumanServices),A Guide to Australian Government Payments,asabove,3.

17.DHS(DepartmentofHumanServices),A Guide to Australian Government Payments,asabove,3.

18.ABS(AustralianBureauofStatistics),‘2011CensusQuickstats,’website.

19.DHS(DepartmentofHumanServices),A Guide to Australian Government Payments,asabove,6.

20.Asabove,6.

21.ATO(AustralianTaxationOffice),‘EducationTaxRefund—WhatYouNeedToKnow,’website.

22.ATO(AustralianTaxationOffice),Portfolio Budget Statement 2011–12(Canberra:ATO,May2011),209.

23.FaHCSIA(DepartmentofFamilies,Housing,CommunityServicesandIndigenousAffairs),Portfolio Budget Statements 2013–14, asabove,48.

24.FaCS(DepartmentofFamilyandCommunityServices),Portfolio Budget Statements 2001–02: Outcome 1(Canberra:FaCS,2002),5.

25.FaHCSIA(DepartmentofFamilies,Housing,CommunityServicesandIndigenousAffairs),Portfolio Budget Statements 2013–14, asabove,48.

26.Asabove,48.

27.DepartmentofHealth,‘PhysicalActivityGuidelines,’website.

28.BCDE(BroadbandCommunicationsandtheDigitalEconomy)Portfolio, Portfolio Budget Statement 2012–13.

29.ProductivityCommission,Trade and Assistance Review 2011–12(Canberra:June2013).

30.Asabove.

31.Asabovefortariffcosts,andABS(AustralianBureauofStatistics),Labour Force, Australia, Detailed, Quarterly May 2013(Canberra:June2013)foremploymentinformation.

32.JohnDaley,JulianReichl,andLeahGinnivan,Australian Government Spending on Innovation (Melbourne:GrattanInstitute,March2013);ProductivityCommission,Public Support for Science and Innovation(Canberra:March2007).

33.JohnDaley,etal. Australian Government Spending on Innovation,asabove.

34.ProductivityCommission,Public Support for Science and Innovation(Canberra:March2007).

35.Asabove.

36.Forexample,see‘AustralianBusiness’bytheAustralianLaborPartyand‘SmallBusiness:BackingSmallBusinesstoGrowtheEconomy’bytheLiberalPartyofAustralia.

37.VeroniquedeRugy,Why the Small Business Administration’s Loans Program Should be Abolished,WorkingPaper126(AmericanEnterpriseInstituteforPublicPolicyResearch,April2006).

38.RobertJayDilger,Small Business Administration and Job Creation(USCongressionalResearchServiceJanuary2013)foundthat‘businessstartupsplayaveryimportantroleinjobcreation,buthaveamorelimitedeffectonnetjobcreationovertime,’andthat‘startupswithfewerthan20employeestendtohaveanegligibleeffectonnetjobcreationovertime,’whileVeroniquedeRugy,asabove,

27

foundthat‘itishardtoarguethatsmallbusinesses,whetherwomen-ownedorminority-owned,haverealdifficultyaccessingcredit.’

39.AustralianChamberofCommerceandIndustry,Small Business Survey(May2013).

40.CommonwealthofAustralia,Budget2013–14,BudgetPaperNo.1,Statement3AttachmentA.

41.ProductivityCommission,Trade and Assistance Review 2011–12(Canberra:June2013).

42.MarilynHarrington,‘AustralianGovernmentFundingforSchoolsExplained,’Parliamentary Library Background Note(Canberra:DepartmentofParliamentaryServices,31January2011).

43.BrianCaldwell,‘DearPM,pleasedon’tappointaneducationminister,’The Sydney Morning Herald(16August2013);JulieNovak,‘Razorcuts,notpapercuts:Aframeworkforright-sizingcommonwealthgovernmentemployment’(Melbourne:InstituteofPublicAffairs,2012);BronwynHinz,‘Ignoring—wilfullyornot—theGonskireview’sconclusions,’The Drum(28February2012);CharlesMurray,‘DoWeNeedtheDepartmentofEducation?’Imprimis 41(2012).

44.TonyD.Webber,‘WhatisWrongwithMedicare?’Medical Journal of Australia196:1(2012),18.

45.Asabove.

46.TonyAbbott,‘GovernmentexpandsMedicareforthechronicallyill,’mediarelease(9June2005).

47.CDDS(ClosureoftheMedicareChronicDiseaseDentalScheme),‘QuestionsandAnswersforPatients’(DepartmentofHealthandAgeing(DHA)).

48.DAFF(DepartmentofAgriculture,FisheriesandForestry),website.

49.GovernmentofAustralia,‘Statement6:ExpensesandNetCapitalInvestment,’Budget2013–14.

50.PIRSA(DepartmentofPrimaryIndustriesandRegionsSA),website.

51.AFMA(AustralianFisheriesManagementAuthority),website.

52.APVMA(AustralianPesticidesandVeterinaryMedicinesAuthority),website.

53.DAFF(DepartmentofAgriculture,FisheriesandForestry),Budget2013–14.

54.TanyaPlibersek,‘BulkbillingratesforGPservicesreachnewrecordhigh,’mediarelease(13May2013).

55.JeremySammut,How! Not How Much: Medicare Spending and Health Resource Allocation in Australia,PolicyMonograph114(Sydney:TheCentreforIndependentStudies,2011).

56.JosephP.Newhouse, Free for All? Lessons of RAND Health Insurance Experiment(HarvardUniversityPress,1993).

57.JohnDaly,Budget Pressures on Australian Governments(Melbourne:GrattanInstitute,April2013),16.

58.AndrewLeighandRichardHolden,‘Health’spricemustberight,’The Sydney Morning Herald(14April2003).

59.DHS(DepartmentofHumanServices),‘MedicareItemReports,’MedicareStatistics,website.

60.DHS(DepartmentofHumanServices),‘QuarterlyMedicareStatistics’(MarchQuarter2007toMarchQuarter2013).

61.DHS(DepartmentofHumanServices),‘2013MedicareSafetyNetThresholds,’website.

62.JanePirkis,etal.,‘EvaluationoftheBetter AccesstoPsychiatrists,Psychologistsand GeneralPractitionersThroughtheMedicare BenefitsScheduleInitiative,’finalreport(Melbourne:CentreforHealthPolicyPrograms andEconomics,2010),7.

63.IanHickie,SebastianRosenberg,andTraceyDavenport,‘Australia’sBetterAccessInitiative: StillAwaitingSeriousEvaluation?’Australian and New Zealand Journal of Psychiatry45 (2011),814–823.

64.JanePirkis,etal.‘Evaluation,’45–46.

65.SebastianRosenbergandIanHickie,‘WeretheBudgetaryReformstotheBetterAccesstoMentalHealthCareInitiativeAppropriate?—No.’Medical Journal of Australia194:11(6June2011), 594–595.

66.IanHickie,SebastianRosenberg,andTraceyDavenport,‘Australia’sBetterAccessInitiative,’ asabove,815.

67.JanePirkis,etal.‘Evaluation,’asabove,8.

68.IanHickie,SebastianRosenberg,andTraceyDavenport,‘Australia’sBetterAccessInitiative,’ asabove,817–818.

69.Foralternativeapproaches,seeSebastianRosenbergandIanHickie,‘HowtoTackleaGiant: AGenuineEvaluationoftheBetterAccessProgram,’Australasian Psychiatry18:6(December2010),497.

70.IanHickie,SebastianRosenberg,andTraceyDavenport,‘Australia’sBetterAccessInitiative,’ asabove,821.

71.SebastianRosenbergandIanHickie,‘HowtoTackleaGiant,’asabove,496.

72.DHA(DepartmentofHealthandAgeing),‘BetterAccesstoPsychiatrists,Psychologists,andGeneralPractitionersThroughMedicareBenefits(BetterAccess)initiative,’factsheet,website.

Authors

Simon Cowan is a Research Fellow in the Economics Program and Program Director of TARGET30.

Dr Jeremy Sammut is a Research Fellow in the Social Foundations Program.

Jennifer Buckingham is Research Fellow in the Social Foundations Program.

Robert Carling is a Senior Fellow in the Economics Program.

Trisha Jha is a Policy Analyst in the Social Foundations Program.

Alexander Philipatos is a Policy Analyst in the Economics Program.

Acknowledgment

The authors would like to acknowledge the assistance of all the reviewers and the staff at The Centre for Independent Studies for their input and efforts in putting together this report. All errors are the responsibility of the authors.

CIS TARGET30 • T30.05 • ISSN Print: 2201-7615 • ISSN Online: 2202-3240 • ISBN: 978 1 922184 22 1 • AU$9.95Published November 2013 by The Centre for Independent Studies Limited. Views expressed are those of the authors and do not necessarily reflect the views of the Centre’s staff, advisors, directors or officers. © The Centre for Independent Studies, 2013This publication is available from the Centre for Independent Studies.PO Box 92, St Leonards, NSW 1590 Australia • p: +61 2 9438 4377 f: +61 2 9439 7310 e: cis@cis.org.au