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August 2014

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The new state Government has been very clear that its pre-election promises will be kept. So instead of looking at hypotheticals, it is worth looking at four points that could, and I would argue should, be in the budget.

It’s a cliché that governments should act more like businesses. This means that they should continually review the services they provide and reduce their costs when there is insufficient revenue.

We are facing deficits of at least half a billion dollars. That is serious money, and the Budget must start the process of reducing the cost of government.
However, while every job is important to the individuals affected, reducing the overall number of State service jobs should be an outcome of budget reforms not a target in itself. Similarly the proposed wage freeze, while painful for many households, is a key business-like response to mitigate further job cuts.

The first (and critical) point to look for in the budget is an indication that the government is committed to a cultural change that recognises it cannot solve every problem through new spending.

Strategic reviews need to be undertaken of the big-spending agencies, particularly focusing on what services the community expects from government and the efficiency and effectiveness of in-house service delivery. If the community still wants services that government agencies do not deliver efficiently or effectively, it is time to look at different delivery models with public servants having a narrower role to manage funding and contracts.
The government has already started this in health, committing to a single Tasmanian Health Organisation and a public strategic review of service delivery to be completed by March 2015.

Education should be next. It is well known that Tasmania spends more money and gets worse results in education. Tasmania’s NAPLAN scores continually fall behind minimum standards. Year 11 and 12 retention rates are unacceptable. Far too many students leave school with no idea what career or further education they will pursue.

As a case study in the effectiveness of government education spending, a program called Guaranteeing Futures costs in the order of $7 million per annum. The outcomes clearly show that it isn’t working very well. In contrast, the Beacon Foundation has always relied on private sector funding to run its school-based programs, with a very small contribution from the former government, but it achieves retention rates of 95 per cent for students after they complete year 10.

The government is providing additional funding to Beacon for three years, but a deeper reform could be making a large share of that $7 million available in a contestable process to any organisation to manage school participation and career pathway programs.

The second point to look for is a clearly articulated strategy to respond to Federal funding cuts to health and education totalling $2.1 billion over the next decade, while improving health and education outcomes. This is self-evident, particularly as the State government has committed to funding its share of the “Gonski” education reforms for six years. Ultimately, the Federal budget may mean pressure for all the States to raise their own inefficient taxes — which the new government has ruled out — or broadening or raising the GST.

The third point is increasing transparency in the State budget. When it was making strong early progress on its savings strategies and curtailing the rate of spending growth, the former government published quarterly data on the number of State servants employed by agencies, and the associated full-time equivalent positions. However, it quietly dropped less than a year later, at the same time it stopped chasing harder savings and instead pushed back further job losses beyond this year’s election

The Budget papers could also provide more information on individual program spending within agency budgets and the associated KPIs, otherwise the success or failure of much of the government’s spending is impossible to measure from the outside.

The fourth point to look for in the budget is the financial performance of its government businesses, and a focus on ensuring they are efficient, effective and delivering stronger dividend and tax returns. This is particularly important as the government has ruled out privatising its major commercial assets during this term of Parliament, notwithstanding that privatisations do not provide a quick fix to the budget nor address unsustainable government spending.

Hydro Tasmania is clearly under pressure from an oversupplied wholesale market and policy changes such as the removal of the carbon tax and threat to the renewable energy targets, and has announced its own restructuring and job losses in response.

TasNetworks is the newest government business. The budget needs to show that significant synergies will flow to its owners from combining the management of publicly-owned transmission and distribution networks. At the same time, it must continue to hold back upward pressure on electricity prices for all customers, including major industrial users that have a greater exposure to transmission costs, and respond strategically to the ongoing strategic challenges of slowing demand growth and increasing solar penetration.

The smaller government businesses also need to pull more weight. Several are essentially unprofitable or reliant on government funding. And one of the riskier assets — at least until its customer book can be sold at some point in the future — is Aurora Energy, which as a small standalone retailer has an effective monopoly in the residential market but is confronting competition in its business and commercial market and the threat of other new entrants.

Tasmania is not alone, as every State government is facing similar fiscal challenges that have been exacerbated by the Federal budget. Given the size of the deficits being faced, this reform will take several years. The Government’s efforts need to be judged over several years, but starting with these basics of public sector management and transparency will demonstrate that they are committed to the journey.

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