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A $30 billion annual boost that better government can deliver!

By Mark Drummond - posted Wednesday, 31 January 2001

This is part 2 of Mark Drummond's 3-part discussion of an alternative system of government for Australia. Part 1 discussed the benefits of a "best possible" system.

So how does one estimate, in dollar terms, the advantages of abolishing state and territory governments in their present form and moving to a new system comprising carefully designed regional governments?

Using linear regression (basically "line of best fit") methods, it was found (using annual government expenditure data from 1990-91 through 1994-95 in June 1994 dollar terms) that state and territory governments cost about $547 million per annum in fixed costs plus $4120 per head of population. So if, conceptually, we horizontally rationalised the 8 state and territory governments to form a single "state-type" government, we could avoid seven lots of these $547 million fixed cost components and hence save about $3.8 billion per annum, which represents the costs of horizontal duplication among the states and territories in the present system. But the single "state-type" government formed by this horizontal rationalisation process would become, in effect, a second nationwide government operating alongside the existing Commonwealth Government. Massive vertical duplication costs would remain due to the parallel operation of these two nationwide governments, which could be freed up as savings if they were vertically rationalised into a single national government. The vertical duplication costs cannot easily be estimated as the horizontal duplication costs can, but plainly much more than $4 billion per annum could be saved by consolidating the present state, territory and Commonwealth governments into a single nationwide government, leaving local government more or less in its present form.


Assuming that regional governments in some form would replace state and territory governments, we should estimate how much these might cost. Of all the provincial governments operating in Australia, the ACT government is that which future regional governments would probably most closely resemble. Now, Australia's total population in June 1994 was 59.3 times greater than that of the ACT, and when the ACT government's 1994/95 outlays figures are multiplied by 59.3, a total of $75.5 billion emerges, which was $9.4 billion less than the total amount spent by state, territory and local governments that year. Taking averages of the five years of outlays figures from 1990-91 through 1994-95 suggested that about $6.6 billion per annum could be saved if we moved to a system of 60 regional governments based on an ACT government-style model. And, assuming the $547 million per annum fixed costs associated with state/territory style governments, if a 40 region model was adopted, the annual savings figure would rise by 20 (the difference between 60 and 40) lots of $547 million (i.e. $10.9 billion) to $17.5 billion. But such savings assume that the regional governments (numbering 40 or 60 or whatever) would retain all the powers and responsibilities held by the ACT government at present – in other words, all the powers and responsibilities held elsewhere by the states (and Northern Territory) and local governments combined!

The analysis of government outlays figures from 1990-91 through to 1994-95 also revealed that state/territory governments incurred fixed costs of around $88 million per annum for education, $96 million per annum for health, and $37 million for public order and safety, and hence $221 million per annum for these service areas in total. So if the formation of 60 regional governments like the ACT government was accompanied by a transfer to the national government of powers and responsibilities for education, health, public order and safety, additional horizontal duplication costs of some $13.0 billion (59 lots of $221 million) per annum could be saved, or $8.6 billion (39 lots of $221 million) per annum if 40 regions were formed. So the total annual savings achievable through a move to a system of 60 regional governments like the ACT model, but without powers and responsibilities for education, health, public order and safety, would be approximately $19.6 billion ($6.6 billion plus $13.0 billion), or about $26.1 billion ($17.5 billion plus $8.6 billion) if there were 40 regions.

We can reliably assume that a move to a system of 60 or less regional governments could achieve annual duplication cost savings of at least $10 billion and probably more than $19 billion. Or, in percentage terms (noting that governments at all levels are now spending just over $180 billion per annum), duplication cost savings of at least 5 per cent of government outlays at all levels, and probably more than 10 per cent, appear achievable. But this is only the government sector component of the savings that can be realised. Massive additional savings can be achieved for the benefit of the non-government sector by rationalising the Commonwealth, state, territory and local government regulatory frameworks in our present system and the compliance cost burdens they impose. If the 10 per cent probable cost savings estimate suggested above extended to our full $600 billion per annum Gross Domestic Product, the total cost savings estimate would amount to some $60 billion per annum. If just the 5 per cent minimum cost savings estimate suggested above applied, the total cost savings would amount to some $30 billion per annum. And even if just a 3 per cent savings estimate was applied to the non-government component of GDP (around $400 billion per annum), that would still amount to a $12 billion savings estimate for the non-government sector and estimated total annual savings of at least $22 billion ($12 billion plus $10 billion) and probably more than $31 billion ($12 billion plus $19 billion).

A $30 billion annual overall savings estimate clearly seems realistic, of which the first $10 billion appears beyond any reasonable doubt, the second $10 billion nearly as certain, and even the third $10 billion appears claimable on the balance of probability, though each additional increment of savings claimed obviously becomes progressively more difficult to "prove". But whatever the real savings are, they represent the costs of retaining our present system which compound relentlessly year after year, and further compound severe economic disadvantages associated with our unique geography. Whereas at Federation we were about the wealthiest country in the world, the rigours of global competition have seen our wealth slip significantly relative to other first-world democracies. At the Centenary of Federation our dollar is now worth less than half the US dollar value it held in 1981, representing an average annual devaluation of 4 per cent compounded over 19 years. This decline is no doubt partly due to the unique disadvantages we face due to our far-flung settlement patterns and isolated location between Asia and Antarctica. But we have also suffered under the increasingly crippling weight of nine centralised sovereign governments (the commonwealth, state and territory governments) and the enormous, relentlessly compounding costs of duplicated bureaucracy and regulatory friction they impose.

We can do little to change our geographical circumstances and associated economic disadvantages, but fortunately, our Constitution and democracy do allow us to change our system of government to better meet our future challenges and needs.

This is part 2 of Mark Drummond's discussion. Part 3 will examine ways that a change can be made to the existing system.

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About the Author

Mark Drummond is a mathematics and statistics teacher at the Canberra Institute of Technology who completed a PhD thesis in 2007 at the University of Canberra titled Costing Constitutional Change: Estimates of the Financial Benefits of New States, Regional Governments, Unification and Related Reforms.

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