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New Approaches, New Institutions? A National Symposium Federalism & Regionalism in Australia.

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Presentation on theme: "New Approaches, New Institutions? A National Symposium Federalism & Regionalism in Australia."— Presentation transcript:

1 New Approaches, New Institutions? A National Symposium Federalism & Regionalism in Australia

2 QUANTIFYING THE COSTS AND BENEFITS OF CHANGE --Towards a Methodology Christine Smith, Economics, Griffith University

3 Federalism & Regionalism in Australia THE NEED FOR CHANGE Focus on economic factors, other symposium papers focussed on other factors

4 Federalism & Regionalism in Australia FEDERAL-STATE RELATIONS Calls for Change: “Australia’s federation needs new life breathed into it for the benefit of the community and business. In just about every major policy area our approach to intergovernmental relations presents barriers and obstacles to getting sensible outcomes… The time has come to take a more holistic approach to our system of intergovernmental relations so that our federation works for us rather than against us” (Australian Industry Group, 2005) “We should be thinking about untangling this mess, creating simpler lines of responsibility in our federal system… And that means a serious debate the tertiary education sector, the possibility of the states transferring responsibility holus-bolus to the Commonwealth, or about a hospital system or disability services being better managed by a single level of government without all the perverse incentives for cost-shifting and finger pointing that exist today.” (Bob Carr, 2004)

5 Federalism & Regionalism in Australia FEDERAL-STATE RELATIONS Calls for Change (continued): “Where two levels of government are responsible for different parts of the same system it is difficult or impossible to achieve coordination in policy and funding…. Lack of coordination gives rise to significant overlaps and gaps…with too much funding allocated to some types of service and not enough to others… poor coordination of services in areas of shared responsibility creates major problems for customers, who become confused and frustrated in their efforts to deal with a multi-layered system that shuttles them back and forth” (National Commission of Audit, 1998) “Reform of Commonwealth-State Responsibilities for service delivery, and the associated funding adjustments, are the next area needing serious reform. National Competition Policy focussed on the way in which government interacted with business, and with the commercial activities of government. The next stage must focus on the way government interacts with its citizens and how it delivers services to them” (Bolger, 2005)

6 Federalism & Regionalism in Australia FEDERAL-STATE-LOCAL RELATIONS Calls for Change: “Getting better results out of areas where Federal-State activities intersect is vital. Inconsistencies, duplication and additional costs associated with poorly coordinated or conflicting State-Federal (and local) government policies and regulations affect virtually every area…” (Access Economics, 2005) “Cost shifting is, ultimately, a symptom of what has become dysfunctional governance and funding arrangements. It is time to combine the best efforts of governments and choose a better way. There have been many demands for the three spheres of government to work more closely and eliminate duplication and wasted resources. In a shrinking and increasingly competitive world, the luxury of three spheres of government, with often different agendas, in a country of nearly 20 million people is straining our resources”(Hawker Enquiry, 2003)

7 Federalism & Regionalism in Australia EMERGENCE OF REGIONAL ORGANISATIONS A Fourth, Fifth, Sixth… Tier – necessary or response to inappropriate boundaries/size of other Levels? Calls for Change: Empirical research pointing to regional bodies afflicted by inadequate organisational size, low (usually non-existent) recurrent funding, ‘third world’-style birth and death rates, poorly directed central funds and duplication and coordination problems between and within governments (Beer, et al., 2003) “We recommend that the Australian and State/Territory governments clarify and articulate their respective roles and responsibilities in regard to the provision of support for regional bodies… and determine the base level of core funding required to maintain an appropriate corporate governance framework to enable a regional body to meet conformance, performance and administrative requirements…”(Turnbull Report, 2005)

8 Federalism & Regionalism in Australia MULTIPLE CHANGE AGENDAS Calls for abolition of states –But not consensus on what replaces them Calls for new states –But not consensus on how many or which ones Calls for local government amalgamations –But not consensus on which ones or on what criteria Calls for new regional institutions –But not what powers, functions, resources or reporting mechanisms

9 Federalism & Regionalism in Australia NEED TO MOVE DEBATE ON Develop consensus around a concrete reform agenda or a limited set of such agendas Without flesh being put around reform agendas, detailed analysis and evaluation of costs and benefits associated with change cannot commence Public opinion surveys aimed at further verifying dissatisfaction with current system not helpful to generating this ‘flesh’

10 Federalism & Regionalism in Australia NEED TO GET SPECIFIC What functions (or components of functions): currently exclusively federal, state or local better assigned to other level(s) currently overlapping in terms of responsibility better allocated to a single level exclusively necessarily overlapping but in need of better co-ordination between levels to avoid duplication, etc fall between gaps with current levels leading to formation of regional bodies – how well do these bodies work, how might their performance be improved, could local government amalgamation be a better solution rather than creation of 4 th, 5 th, etc tier?

11 Federalism & Regionalism in Australia MERITS OF FOCUS ON FUNCTIONS An evaluation framework that works with ill-defined models of change and at an aggregate all of government level will not stand up to scrutiny by federal/state treasury officials Substantial amount of data available at a functional level of disaggregation – from government finance statistics, state and federal grants commissions, etc When advocating revised assignment of functions between levels need to also address machinery for shift of resources between levels necessary to carry out these functions

12 Federalism & Regionalism in Australia PREVIOUS ESTIMATES OF NET BENFITS OF CHANGE Numerous government/consultancy reports and the like quote various estimates made by Drummond as to the costs of duplication and coordination inherent with current arrangements These estimates vary from $10-$40 billion dollars per annum, depending on which Drummond calculation is chosen for quotation Most often quoted figure is the $20+ billion claimed to be able to be saved from moving to a two tier system that abolishes the states

13 Federalism & Regionalism in Australia DRUMMOND METHODOLOGY EXPLAINED Assumes government expenditure of any level of government can be divided into a fixed cost component and a single variable cost component The single variable cost component is calculated as a function of aggregate population level in the jurisdiction The fixed cost component is assumed to be associated with overheads or administration of the level of government in question, and hence able to be avoided or eliminated if this level of government is phased out The single variable cost component is seen as solely a function of population levels and so shifts between jurisdictions unaltered in magnitude should responsibility for that population shift to another jurisdiction The size of these components is estimated by fitting a simple linear regression model to pooled time series/cross section data relating to 3 years and 8 states/territories

14 Federalism & Regionalism in Australia PROBLEMS WITH PRIOR METHODOLOGY I Assumption of a single variable cost component flies in the face of large volume of data relating to determinants of inter-jurisdictional variations in costs –Eg. federal and state grants commissions have long recognised in their horizontal equalisation grants that aggregate population size is only one relevant factors –Other factors of relevance include population composition (age structure, ethnicity, indigenous status,etc), population dispersion (number of townships/density), climate and terrain, non-resident service provision Ignoring these other factors leads to an overestimation of the fixed costs component –In technical terms the regression equation is inappropriately specified due to omitted variables, such that at the very least there is a need to move to a multiple regression equation that includes other variable cost terms –In Drummond’s estimation the effects of all these other variable cost factors are being inappropriately attributed to the fixed costs component, leading to its overestimation

15 Federalism & Regionalism in Australia PROBLEMS WITH PRIOR METHODOLOGY II While Drummond reports the coefficients related to his fixed and variable cost components he does not report the associated standard deviations In addition he does not report results of any regression diagnostic tests conducted – and previous modelling experience suggests that the equation as estimated has some problems that suggest the need for re- specification –In particular, as other critics have pointed out it is more usual to estimate models relating to government expenditure in per capita terms because of serial correlation between total expenditure and population More substantively, however, to assume that functions currently carried out by a state government could be transferred to the federal government without altering either the fixed cost or the variable cost component associated with population size is arguably unrealistic

16 Federalism & Regionalism in Australia PROBLEMS WITH PRIOR METHODOLOGY III Similarly, by using pooled time series/ cross section estimation the assumption is being made that ALL state governments host equal fixed and variable costs – so that amalgamation of two states, for example, is argued to liberate cost savings equal to one quantum of fixed costs. This assumption is unrealistic. Finally, the assumption was made that individual state deviations around the regression line were accounted for by higher or lower FC and not higher or lower VC – the associated recalculations resulting in a near doubling of the estimated cost savings –Yet via use of a more extended time series of expenditure data and the use of dummy variables for the different states, the validity or otherwise of this assumption could be readily tested

17 Federalism & Regionalism in Australia TOWARDS A MORE SOUND APPROACH Could adopt an aggregate level of analysis for each level of government and improve Drummond like econometric analysis –However, this ignores previous case made for a focus on functions –Also, it works best for an ‘abolish the states’ agenda, not other more realistic agendas A sounder approach would –Take a particular function, analyse costs of current mode(s) of delivery, identify potential net cost savings from a small set of change proposals –Repeat this for major functions seen as problematic –Sum results across functions to identify order of magnitude of savings for each change proposal –Develop a ranking of change proposals on criteria of net economic benefits

18 Federalism & Regionalism in Australia FURTHER COMMENTS ON SUGGESTED APPROACH Not all functions need be covered, only major ones or ones seen as problematic currently in first instance The change proposals, while needing to be reasonably detailed, need only be representative of possible directions of change in first instance What needs identification is which types of change can potentially reap net economic benefits and which seem likely to generate net economic costs With this information to hand, change proposals can be better developed and refined –debate can then progress to a level likely to lead to achievement of the type of changes public opinion surveys suggest is desired by the electorate

19 Federalism & Regionalism in Australia CONCLUSION Aim of paper not to provide answers to whether or not change to current federal structure and/or financial arrangements will generate net economic benefits Rather to point to directions debates surrounding federalism and regionalism need to move in order to permit a framework capable of providing such answers to be developed


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