AUDIT COMMISSION: 15 Government Spending Areas That Are Causing Structural Budget Problems

BCA president Tony Shepherd, who headed the government’s commission of audit

Most of the future growth in Federal Government spending is concentrated in the 15 largest and fastest growing programs which account for around 70% of total growth in spending over the next ten years.

Unchecked, the Commission of Audit says, spending is likely to rise from $409 billion today to $690 billion in over the next decade.

Here are the areas where structural savings have to be made, according to the commission:

The Age Pension should be maintained as an essential part of the social safety net, but changes are necessary to keep it affordable and appropriately targeted. As many Australians make significant decisions in the lead up to their retirement, ample warning should be provided to future retirees of any significant changes. No existing recipient of the Age Pension will have their pension amount reduced in real terms as a consequence of the commission’s recommendations. Under the Commission’s proposal to benchmark the Age Pension to 28% of Average Weekly Earnings over a period of around 15 years, the pension will still increase but will grow more slowly than in the recent past. From 2027-28, for new recipients, the commission proposes changes to Age Pension eligibility including a comprehensive means test, including for some recipients part of the value of the principal residence, as well as tighter targeting arrangements. Further increases in the Age Pension eligibility age are also recommended from 2033 to establish a formal link to life expectancy.

The National Disability Insurance Scheme. There should be a slower roll out of the scheme. It is also essential that the cost of the scheme be strictly controlled. The governance arrangements for the NDIS are complex, with multiple layers of responsibility, and should be reformed. This can be achieved by making the National Disability Insurance Agency a prescribed statutory agency with a Chief Executive Officer reporting directly to the federal minister. The governance changes would have no impact on eligibility for the NDIS or the proposed financial contributions of the Commonwealth and the States.

Health care. This is the Commonwealth’s single largest long-term fiscal challenge, with expenditure on all major health programmes expected to grow strongly to 2023-24 and beyond. Those with the capacity to pay should take greater responsibility for their own health care needs. Co-payments for all Medicare funded services are proposed along with reforms to improve the effectiveness of private health insurance arrangements and the effectiveness of Medicare. The co-payment is $15 per visit for the first 15 visits.

Hospital funding is largely driven by the Commonwealth’s commitment to fund 45% of the efficient growth in public hospital costs from 2014-15 and 50% from 2017-18 onwards. The Commission considers that public hospital service provision should remain the responsibility of the States and that hospital funding should be considered in the context of addressing vertical fiscal imbalance. A closer matching of revenue-raising capacity with expenditure responsibilities would result in greater flexibility to the States to deliver their public hospital services. The Commonwealth could renegotiate the health funding commitments and, in the meantime, limit its funding contribution to public hospital services to 45% of the efficient growth in this cost.

The Pharmaceutical Benefits Scheme is an integral part of the health system but a more holistic approach is needed to manage it. The Commission proposes that a new independent authority oversee management of listing drugs within a designated seven year funding envelope. Co-payment arrangements for the PBS should also be changed so that all users pay at least some contribution to the cost of medicines. To improve consumer choice, the pharmacy sector should be opened to competition.

Family Tax Benefits. Around 70% of Australian families currently receive some form of support through Family Tax Benefits A and B. Family Tax Benefits should be better targeted to those in need and simplified with a view to boosting workforce participation. The Commission recommends Family Tax Benefit Part B be abolished with a new supplement paid to sole parent families who lose this benefit. Eligibility for Family Tax Benefit Part A should also be tightened.
Paid Parental Leave. The benefits have to be balanced with the cost to the Commonwealth Budget and the principle of targeting expenditure to those most in need. The Paid Parental Leave payment should be capped at Average Weekly Earnings. The Commission considers that the company tax surcharge intended to partly fund the Scheme be retained, with savings from the lower cap redirected to an extended form of child care assistance. This would include assistance for in-home care and other types of care that are currently not subsidised. Child care assistance more generally should be simplified and broadened by replacing the current dual assistance system with a single, means-tested payment reimbursing all parents for a proportion of their child care costs.

School education. All policy and funding responsibility for government and non-government schools should be transferred to the States with the Commonwealth providing annual funding in three separate, non-transferrable pools: government schools, Catholic systemic schools and independent schools. Annual per student funding from 2018 would be set at 2017 levels in each State and indexed by a weighted average of the Consumer Price Index and the relevant Wage Price Index. Of course, national standards and performance reporting to the community should be maintained. Thi should result in a significant reduction in the size of the Department of Education.

Defence funding should be set on the basis of first determining the defence capability the country requires given the strategic circumstances it faces, and then matching this with appropriate funding. Tthe Government should assess the balance of strategic and fiscal priorities and how this compares with the commitment for Defence spending to reach 2% of GDP within a decade. Defence budgeting should also be clarified and made more transparent, with greater scrutiny through the Government’s Expenditure Review Committee. The Commission also recommends that the Defence Materiel Organisation be reintegrated into the Department of Defence. New arrangements should be put in place to ensure greater individual accountability for the Secretary of the Department of Defence and the Chief of the Defence Force through a clearer delineation of their roles and responsibilities. The headquarters structure in Defence, including the number of senior positions, should be cut to 1998 levels. ASC Pty Ltd and Defence Housing Australia should be privatised.

Aged Care. Further improvements could be made to the sustainability of Australia’s aged care funding by progressing reforms previously suggested by the Productivity Commission. This includes reforms to ensure the full value of the principal residence is included in the current aged care means test. The Government should examine options to improve older Australians’ access to equity in their principal residence, to help pay for part of the cost of their aged care services.

Carer Payment and Carer Allowance. Assistance should be better targeted to those most in need. Changes should be made to: ensure Carer Payment is paid to those whose caring responsibilities limit their capacity to work; introduce an income test for the Carer Allowance; and impose a limit of one annual Carer Supplement payment per carer.

Unemployment benefit. The Commission recommends retaining Australia’s current arrangements as a major pillar of the social safety net but making changes to improve incentives to work including: requiring single young people without dependants or special exemptions on the Newstart Allowance to relocate to higher employment areas after 12 months on benefits; and increasing the income test withdrawal rate for the Newstart Allowance. The Commission also considers that containing future growth in the minimum wage would improve job opportunities, especially for lower skilled Australians. It will also ensure that government programs to get people into work are more effective. The Commission also recommends that minimum wages be set on a State basis to better reflect local labour market conditions and cost of living expenses.

The Disability Support Pension should be maintained as an essential part of Australia’s social safety net but changes be made to ensure it remains fair and paid to those genuinely unable to work. This includes moving to gradually apply the new disability assessment and participation criteria, introduced in January 2012, to targeted groups of Disability Support Pension recipients previously grandfathered, including those under the age of 35 and those with some work capacity.

Higher education. A rebalancing of public and private contributions to is warranted, reflecting the substantial private benefits that arise from higher education. The proportion of higher education costs paid by the Commonwealth should be decreased to an average of 4%, with the proportion of costs paid by students rising to an average of 55%. Changes should be made to the existing Higher Education Loan Programme arrangements to increase repayment rates by lowering the income threshold at which student loans are repaid and ensure interest rates reflect the Commonwealth’s full costs in making these loans including the cost of bad and doubtful debts. The Commission supports the current review of the demand-driven system and has concerns about the impact of that system on standards.

The foreign aid programme needs to be more effectively managed and strategically targeted. Official development assistance should not be tied to a target such as 0.5% of Gross National Income. The fragmentation of Australia’s aid programme should be addressed with a new focus on outcomes achieved rather than the quantity of resources applied. increasing future aid spending at a rate no greater than the rate of inflation.

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