Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F6. Transfers tied to goods and services

F6–3 Differing mechanisms to deliver government-supported goods and services

The use of transfers tied to goods and services to support the consumption of merit goods raises the broader question of how governments provide support for merit goods in general. Governments support a range of goods and services in Australia, such as public hospitals and public schools. For these services, governments generally provide funding to a limited number of suppliers (usually government-operated) in a block grant type arrangement. While this funding is not provided directly to people in the same way as other transfers are provided, it also helps people access goods and services to improve their wellbeing.

Current arrangements appear to have largely historical origins rather than to result from comprehensive assessments of the best ways to fund or deliver services. For example, there is a strong presence of direct public sector provision in schools and hospitals, but not in child care or aged care where large increases in demand have emerged relatively more recently. Changes are slowly evolving — in recent years there has been a shift to greater private provision in schools and a decline in the role of public housing. There has also been a growing reliance on contracting services to non-government organisations. But in these and other cases it is not clear whether developments are following changes in demand or assessed needs, or whether other forces are shaping funding and supply policies.

One result of current arrangements is that there are substantial differences in the ways in which the same or similar services are funded and delivered through public and private mechanisms. It is not clear that these differences ensure that public objectives such as equity are being met, nor that the full potential benefits of user-directed choice are being obtained. These differences are further complicated by the fact that the different levels of government take different levels of responsibility for providing funding. In general, the Australian government often provides funds for private sector provided services, usually requiring or allowing private co-payments, and often providing a degree of user choice. The States, on the other hand, assisted by grant funding, usually provide public services free of charge on a universal access basis (hence often also generating waiting lists). The combination of these arrangements may or may not produce equitable outcomes, and may or may not produce efficient service delivery. In many areas, there is considerable concern about various aspects of these outcomes. The different roles of the different levels of government also raise issues about transparency and accountability for outcomes.

The assistance governments deliver through direct service provision often interacts with parts of the tax and transfer system that aim to deliver similar outcomes. For example, the need for the medical expenses offset or the private health insurance rebate is influenced by how governments fund (and how people are able to access) hospitals and health services. Another example arises in the housing sector, where access to affordable housing is supported by three broad mechanisms:

  • housing funded and provided directly by governments at rental rates below market rates, such as public housing;
  • housing provided by non-government or private providers who are funded under government contracts, such as grants to community housing providers; and
  • housing provided by non-government providers where renters are given government funding, such as rent assistance, directly.

The mechanism that governments choose to deliver assistance is to a large degree dependent on the objectives governments want to achieve. For example, if the government's goal is that all household rubbish is collected, it may be more effective to provide the service directly or contract a single provider, rather than providing individualised assistance to households and compelling them to contract a service provider.

However, as cost pressures grow in the future, governments need to make sure the mechanisms they use are as efficient and equitable as possible. Governments also need to ensure that the mechanisms they use do not lead to unintended outcomes. For example, while governments may choose to subsidise public transport with the aim of reducing traffic congestion and carbon emissions, such subsidies may provide greater benefit to those with higher incomes. IPART (2004) found that over 60 per cent of full-fare paying trips on Sydney ferries (which are subsidised and priced below actual cost) are taken by residents with household incomes over $100,000 a year. Further, in 2001 and 2002, CityRail's subsidy per passenger kilometre was significantly lower than subsidies provided by Sydney Ferries, despite the fact that users of CityRail services come from lower-income households than users of Sydney Ferries.

Governments and the public should be aware of such outcomes, but the manner in which these subsidies are provided often makes it difficult to identify and quantify them.

Reform directions

Recommendation 108:

The Productivity Commission should examine the principles of public service delivery and the mechanisms that are available to governments to deliver public services and their implications for financial arrangements in the federation. The findings of this study should be considered by COAG.

While the size and range of government-supported services is outside the terms of reference of the Review, it is clear that the capacity of the tax and transfer system to deliver improvements to people's wellbeing is highly dependent on how governments fund and deliver public services such as health and education. Governments should explore the potential for different mechanisms to deliver government-supported services in more effective ways. This is particularly so because governments in Australia have moved to a much more complex environment for service delivery. In this environment, the same or similar services are provided via a range of mechanisms.

While the overall provision of government-supported services in Australia (compared to 22 other OECD countries) has been found to be relatively efficient (Afonso et al. 2003), other studies that have focused on specific services in Australia have revealed many areas where better outcomes could be achieved. Population ageing is likely to put greater pressure on the need to achieve value for money in public service delivery.

A useful starting point would be for the Productivity Commission to examine the principles of public service delivery; that is, what governments should be seeking to achieve in funding public services. This study should also examine the mechanisms that are available to governments to deliver public services and how appropriate they are for different types of public services.

The outcome of any review of these issues would potentially have significant implications for the tax and transfer system, including the best assignment of taxing powers between the levels of government. It is possible that they would lead to a stronger funding (as opposed to service delivery) role for the Australian government. It would be unfortunate if tax and transfer decisions were made in isolation of the consideration of these related issues by all governments.

As all three levels of government in Australia are closely involved in public service delivery, the findings of the Productivity Commission study should therefore be considered by COAG.