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The worst of wasteful government spending

By Brendan O'Reilly - posted Thursday, 2 August 2018


The late Kerry Packer famously saidat a 1991 Government inquiry:

I am not evading tax in any way, shape or form. Now, of course, I am minimising my tax, and, if anybody in this country doesn't minimise their tax, they want their heads read because, as a Government, I can tell you you're not spending it that well that we should be donating extra.

Packer was correct then, and little has changed since.

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Below are examples of (what I regard as) the worst of government waste, along with my reasoning. The ranking is not strict, and there certainly are deserving but omitted contenders.

I have excluded so called "moral hazard" (affecting the biggest areas of outlays, like social security and health). It covers effects like illegitimacy rates soaring in response to the availability of sole parent pensions, people squandering their lifetime earnings in the knowledge that the State will provide an age pension and subsidised housing, and over-use of "free" health services in the absence of price signals to consumers.

1. Cancellation of Melbourne's East-West Link. I am putting this at the top of the list simply because this exercise was pure waste, leaving almost nothing to show for the outlay. The Andrews Government in 2015 agreed to pay $339 million to the project consortium to walk away from this freeway contract initiated by the previous government. The Victorian Opposition claims that there was an additional $400 million to $500 million in sunk costs already incurred by the State Government, bringing the total cost for a road never built to between $800 million and $900 million).

2 "White-Elephant" Desalination Plants. Some years ago, because of green-left opposition to building new water storages, state governments sought to simply curtail demand for water by lifting charges (also generating revenue). The problem was that, as drought reappeared from 2003 to 2010, there was very little scope for further water savings. Spurred on by a fit of climate change alarmism, state governments panicked about the lack of water in storage, and went on an orgy of spending on desalination plants (massively more expensive to build and operate than storage dams that can fill at virtually no cost).

All of the mainland states have built huge and expensive desalination plants, with that in Melbourne by far the biggest. A reasonable case can be made for the desalination plant in Perth but the rest have been a costly waste of money. The Melbourne plant cost about $4 billion, the Sydney plant $1.803 billion, the Gold Coast plant $1.2 billion, and the Adelaide plant about $2.2 billion. By way of illustration, the Sydney plant's costs are more than $500,000 a day, although it has not supplied any water since 2012. Desalination also uses enormous amounts of electricity (which is now very expensive in this country) and (despite not being used) these plants have been responsible for adding $100 to $200 annually to household water bills.

3 Collins-Class Submarine Replacement Project. This $50 billion project seeks to replace Australia's problem-plagued Collins-class submarines with subs from French shipbuilder DCNS. The project has design issues because standard French subs are nuclear-powered. There is a bipartisan commitment to buying diesel-electric powered subs, and (seemingly for vote-buying reasons) to building them in Adelaide, even though this might add 40 per cent to the cost. The Australian contractor, Australian Submarine Corporation (ASC), also has a dreadful record on other projects.

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Anecdotal evidence suggests that (privately) our defence professionals support buying off-the-shelf nuclear-powered submarines, for reasons of performance, reliability, and much more bang-for-the-buck.

The mistake of the sub project is being repeated in the recently announced decision to spend $35 billion building nine British-designed anti-submarine frigates (mainly) at SA's Osborne shipping yard. ASC is again to be the main domestic player (in another vote-buying exercise), with the contract being rushed in order to prevent the Adelaide shipyards being shut down due to lack of other work. It seems that the hull will be Australian built with most of the systems and internal workings coming from overseas.

The stark truth is that the government could be saving tens of billions, and be getting more reliable vessels by instead shutting down Australia's (uncompetitive) ship/sub building industry, and buying the superior overseas product at much lower cost.

4. Expensive Electricity: Australia is systematically destroying itselectricity system by replacing cheap and reliable coal-based generators with intermittent wind and solar power. The additional costs to industry and consumers will impact for decades, even if common sense eventually prevails.

Australia now has electricity costs up to double those of the US and Canada, and our power prices have increased by more than 60 per cent in the ten years to 2017. Huge subsidies for renewables (aimed at "saving the planet"), and a failure of regulation (to control excessive spending on "poles and wires" and gouging by energy retailers) are the main causes. In aggregate, the subsidies paid to producers of renewable electricity were estimated at about $3 billion in 2015-16 or tens of billions to date.

Coal and nuclear are the two cheapest sources of base load power but (in terms of new electricity plants) the Turnbull Government and most of the States won't contemplate either. This is despite a recent acceleration in carbon emissions by the rest of the world, indicating that efforts to reduce "greenhouse" emissions won't work.

In 2017 global emissions grew by around 2 per cent. (China currently has 220 coal-fired power stations under construction and a further 266 planned. India has 77 coal-fired electricity stations under construction and a further 116 planned, while the US has withdrawn from the Paris Agreement.) Australia's shunning of coal-fired energy in the face of this seems futile, and would be equivalent to Saudi Arabia banning the domestic use of its oil.

5. National Broadband Network (NBN): The NBN,which to date (in pared back form) has cost at least $50 billion, was simply a huge high-risk mistake, and no private company would ever have built it. In essence the (Rudd) Government ignored prospective improvements in wireless technology and continuing moves away from landlines. (To date over a third of consumers have ditched their landlines.) It is widely believed that the NBN will face stiff competition from 5G mobile technology, and is likely to be eventually sold at a huge loss. A mere $10 billion valuationis typically quoted for an anticipated eventual government exit.

6. Ill-Considered Education Spending: Annual educational expenditure of around $33 billion makes this the third biggest area of Commonwealth outlays. The States spend nearly double this again. In past decades big increases in school funding were spent on reducing class sizes.

The Coalition's Gonski 2 is set to see Commonwealth funding for schools almost double from $17.5 billion to $30.6 billion by 2027. The issue is that there is little correlation between either class sizes or amounts invested in education, and improved educational outcomes. The original Gonski was simply an expensive way of addressing a dispute over funding allocations. Rudd and Gillard's $16 billion "Education Revolution", which led to spending on school buildings on a rushed and unprecedented scale, was another big waste.

In the vocational sector, VET Fee-HELP cost taxpayers $7.5 billion between 2009 and 2016, most of which went to private colleges. The scheme was subject to considerable fraud, based on targeting of potential students, who often had little hope of completing their course or repaying their loans.

University funding and enrolments have soared in recent decades, only levelling out recently. Arguably the move to a demand-driven system associated with higher university participation rates was a costly mistake, because it lowered standards and attracted students of questionable academic ability. It is also clear that the employment and salary prospects of new graduates have deteriorated significantly in the context of the surge of new graduates.

Finally, much of our regularly-hyped international student industry has only a limited education purpose. It is often more about foreign students gaming our immigration system, with considerable revenues (in many cases) representing de-facto bribes for back-door permanent residency or working visas.

7. National Disability Insurance Scheme (NDIS). The NDIS is not an insurance scheme. It is merely a spendathon (driven by a surge in young people participating, and in spending on equipment and carers). It was never properly planned or funded. Because of the transfer of much governance from the States to the Commonwealth, the scheme has also involved administrative upheaval.

The NDIS was a valedictory promise by PM Gillard, intended to secure her legacy as a social reformer. Cost/funding was an unimportant consideration at the time. Unfortunately the then Abbott-led opposition did not have the political courage to oppose it (as unaffordable), and the Coalition committed to the NDIS at the 2013 election.

Pre-NDIS state and federal disability funding of $6.5 billion was originally expected to rise to $13.6 billion. The Productivity Commission upped this estimate to $22 billion for the "first full year of operation". Fears are growing that the blowout will be far greater. Official figures reportedlyforecast the total cost ballooning to $32bn a year in 2028-29.

8. Cost-ineffective Government Administrative Practices. Governments seem to be innately incapable of getting value-for-money in much of their everyday spending. We still also have end-of-year spending sprees, whereby government agencies routinely rush to spend what remains of their budget allocations. This contrasts with private business, where under-spending or cost-saving is considered a virtue.

The Commonwealth Government in recent decades has sought "savings" through redundancies and out-sourcing. The strategy has worked poorly. Redundancies were largely voluntary and untargeted. They provided windfall benefits to many approaching retirement or encouraged valued employees to leave. Many of the latter subsequently were either re-hired or taken on as consultants.

Commonwealth Government agencies have more than doubled their spending on contracted labour as the Coalition reduced its workforce. A 2017 audit report showed that cuts in public service jobs coincided with a doubling in spending on consultants. Commonwealth officials have told a parliamentary inquiry that IT contractors cost double the salary of public servants doing the same work, while non-IT labour hire workers can receive up to 50 per cent more.

WA taxpayers over a four year period to 2017 paid out nearly $600 million on voluntary redundancy packages for over 5,000 public servants. Despite the payouts, the size of WA's public service actually increased slightly over that time.

As far as individual spends are concerned, there are innumerable examples of governments paying too much. Renovations at the Prime Minister's official Canberra residence resulted in a $12 million bill to taxpayers (far more than the renovated Lodge is actually worth), while a security upgrade of Parliament House ended up costing a staggering $126 million.

Politicians' travel is rife with rorting. Federal parliamentarians receive about $300 per night to stay in Canberra despite many either owning a Canberra residence or renting a flat. It is also common for politicians to arrange a "work" meeting as a pretext for a holiday, social or campaigning event so that the taxpayer bears what should be a private travel cost.

Finally, there is pork-barrelling. This is a major feature of Government but is essentially a form of corruption. In the recent bi-elections, in an effort to buy votes, commitments by both major parties (for just the five seats) totalled more than $530 million. More generally, billions are regularly spent on infrastructure projects, that can't be justified on cost-benefit grounds.

Despite all the problems with dodgy government spending, the fact remains that very many services provided by government are essential. Minimising waste therefore comes down to limiting government spending to those key areas, and not engaging in activities better done by the private sector.

Most taxes are unavoidable. Some (particularly the educated, the well-off, and those who are self employed) have capacity to reduce their income tax liabilities. Others (the majority), especially ordinary wage and salary earners with commitments, are "sitting ducks" for the Tax Commissioner.

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About the Author

Brendan O’Reilly is a retired commonwealth public servant with a background in economics and accounting. He is currently pursuing private business interests.

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