Commission of Audit fails to consider costs and benefits

Commission chair Tony Shepherd has missed an opportunity to spark a genuine budget reform conversation. Lukas Coch/AAP

There are some good ideas in the Commission of Audit report. Unfortunately they’re buried in so much else that it’s hard to find them. For a report focused on the costs and benefits of government, it shows remarkably little interest in the costs and benefits of budgetary reform.

This approach means the audit is a missed opportunity to give Australians the information we need - information that would enable a genuine national conversation about how to best climb out of our budget hole.

The biggest problem is that the report does not say which proposals would save a lot of money, and which only a little.

Proposals such as increasing the age pension and superannuation access ages, which Grattan Institute analysis suggests is worth around A$12 billion a year to the budget, are mixed in with a Medicare co-payment for doctors’ visits, which is worth about $1 billion a year at most (and is a bad idea for other reasons).

Without an assessment of budgetary impact, the extensive discussion about duplication between state and Commonwealth governments glosses over the fact that there are no massive budget savings to be made in this area. Abolishing the entire Commonwealth health department would save less than half a billion dollars a year, which isn’t going to do much to fix a deficit that currently sits at $47 billion.

And without a bottom-up evaluation of proposals, the report’s budget projections outside the first three years are essentially driven by the assumption that annual spending growth will be 2.5% a year in perpetuity. There is no attempt to make future spending align with even ball-park forecasting of the financial impact of individual measures.

Collateral damage

Grattan Institute’s analysis of possible budget solutions in our 2013 Balancing Budgets report sought to identify how much various proposals would save. Consistent with basic principles of public administration, it also looked at the costs. In particular, it considered the possible collateral damage of each individual proposal if it shrank the economy (by discouraging working or investment, for example), caused bad social consequences (such as making housing less affordable), or disproportionately hit the worst-off. Without this sort of information, it’s impossible to tell whether a budget proposal is worthwhile.

Without this assessment, the Commission kicks some appalling own goals. The worst of these is the failure to think about the impact of its proposals on participation. Good welfare policy design ensures that thresholds and taper rates do not create too many disincentives to work.

However, abolishing Family Tax Benefit B – currently received by 60% of families – and tightening eligibility for Family Tax Benefit A would make women in middle-income families less likely to do paid work, because they would lose most of their wages in lost benefits. Previous Grattan Institute work shows that if one partner in a family works full time earning $70,000 a year, it makes no financial sense for the second income earner to work for more than three days a week.

The changes the Commission proposes would see women with children in childcare going backwards financially if they work more than two days a week. Not only is that bad for Joe Hockey’s stated aim of increasing women’s workforce participation, it would hurt the budget by reducing income tax collected from women discouraged from working.

Similarly, the Commission proposes that Newstart benefits be reduced by 75 cents for every dollar earned. Imagine the screaming about disincentives to work if anyone proposes a top marginal rate of tax for high-income earners of 75%.

Weighty, but lacking crucial numbers. Lukas Coch/AAP

Limited savings

In the absence of calculations of the budgetary impact of its proposals, one could be forgiven for missing the key finding of the Commission. For all of its laundry list of ideas, its specific measures only make a difference of about $5 billion a year three years from now. Its “reform scenario” makes only limited changes to the spending growth planned under “business as usual”. This is manifestly too little too late.

The Commission itself found the current budget deficit of 3% of GDP is far too high five years after the end of the GFC. If the government is going to take its structural deficit problems seriously, it will either have to cut more things, phase cuts in earlier, or raise taxes.

The Commission’s failure to identify medium-term savings is due to its insistence that many of the largest proposals should be phased in very slowly. Its proposals suggest that no-one born before 1960 should contribute much to repairing the budgets. Changes to the pension access age and the pension assets test – both big budget reforms – do not even start until 2027 and then only applied to new recipients. It’s not clear why protecting baby boomers but making everyone else pay is a principle of good government.

Some good ideas

So what are the good ideas in the report - the changes that will make a real difference to the budget balance, without really awful side-effects?

The proposals to lift the pension and superannuation preservation ages, include owner-occupied housing in the pension assets test, reform pharmaceutical pricing, better match defence spending to strategic goals, and increase the contribution that students make to the cost of their university degrees were all recommendations of Grattan Institute’s Balancing Budgets: tough choices we need report.

Cutting spending on paid parental leave and redirecting it into childcare is also a good idea, and is supported by international evidence on what really enables women to participate in paid work.

Balancing budgets is important, because it helps us ensure that we have enough money available in the future to pay for the benefits and services that we will need, rather than making future generations pay for what we’re doing now. But by not being clear about the costs and benefits of their recommendations, the Commission has missed a big opportunity to help us all make difficult decisions about what we most value and our country’s future.