Garnaut Fitzgerald Review of Commonwealth-State Funding

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APPENDIX D: Minimum Cost of Government Problems with the CGC methodology There are several drawbacks of using the CGC method for measuring the minimum cost of government. (1) The scale-affected variable cost does not relate to the central office function and as such, does not constitute a component of the minimum cost of government. (2) States differ in their allocation of functions to departments, making comparisons across States inaccurate. In order for the CGC approach to accurately compare States, it would have to ensure a consistent allocation of each expenditure type to a department. This is problematic because two similar expenditure areas located in the same department may share corporate services, and achieve economies of scale. Grouping of expenditure types across departments will vary across States. In addition, in the Northern Territory, much of the central office type functions are undertaken by the Department of Corporate and Information Services, which is a share service organisation providing corporate services to all Government agencies in the areas of human resources, finance, contracts and procurement, superannuation, printing and information services (Department of Corporate and Information Services 2001). (3) The timeframe on which the CGC constructs its central office costs is outdated when applied to current grant distribution. The CGC’s estimates depend upon data from 1993–94 and 1997–98. Only current expenditure will adequately reflect the impact of microeconomic reform upon decisions to allocate resources between labour and capital. As technology becomes more advanced, the resourcing decision of States will move away from labour towards capital. (4) The CGC estimate of the cost of the basic structure of government is unnecessarily narrow as the calculation is restricted to police and education. For the CGC methodology to accurately reflect the minimum cost of government it would need to measure the cost of each functional area of core government expenditure, rather than assuming that the head office structures for police and education are typical of all areas of State Government expenditure. (5) The analysis only utilises data from three States. The CGC has constructed a typical head office for education based on information available for the Australian Capital Territory, Tasmania and the Northern Territory; and a typical head office for police, based on information for Tasmania and the Northern Territory. These three States were selected on the presumption that they would be operating the minimum sized central office, as they have the smallest populations. The use of three States is problematic. FINAL REPORT [222]
APPENDIX D: Minimum Cost of Government An alternative methodology An alternative methodology to measuring the minimum cost of government is sensibly based on the substantial work done to date by the CGC on the fixed cost of the basic structure of government. The existence of economies of scale in provision of government services is fairly uncontentious. It is the minimum population size required to achieve efficiencies, and the population size at which diseconomies of scale occur, that are open to debate. This directly affects how many Australian States have achieved a population size sufficient to achieve economies of scale in provision of head office functions. The CGC assumes that a States’ ability to achieve efficiency in provision of a central office function is directly proportional to its population size. Further work needs to be done on determining at what point economies of scale in central office functions are achieved. It might be that a calculation of a precise population is impossible, and that economies of scale are achieved within an upper and lower population bound. A minimum cost of government will exclude expenditure States incur on functions that do not maintain or enhance the delivery of services that are directly important to the welfare of citizens. These are included under the CGC’s definition of ‘services to industry’. The proposed minimum cost of government would exclude such expenditures. The CGC approach to measuring the fixed cost of a central office is a good foundation on which to base the measurement of the minimum cost of government. In the absence of a definitive analysis surrounding economies of scale, the following modifications should be made to the CGC methodology of measuring administrative scale so that it more accurately measures the minimum cost of government. (1) The data utilised by the CGC needs to reflect the period to which they apply. Outdated data will not be useful in determining the unavoidable expenditure that States incur in provision of central administration. (2) The departmental coverage across States needs to be consistent. As much as possible, the calculation should reconcile functional expenditures consistently across States. (3) The measurement of central office costs should encompass the functions areas in Table D.1 (excluding the ‘Services to Industry’) rather than measuring two areas of expenditure (police and education) and extrapolating them for the other areas. (4) The analysis should utilise data from all States to ensure that bias and policy choice are not being entrenched in the calculation. FINAL REPORT [223]
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Review of Commonwealth-State Fundin
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Review of Commonwealth-State Fundin
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TABLE OF CONTENTS CHAPTER 9: Equity
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THE REVIEW COMMITTEE FINAL REPORT [
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EXECUTIVE SUMMARY Overall assessmen
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EXECUTIVE SUMMARY Each State would
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CHAPTER 1: Overview and Summary of
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CHAPTER 2: How the System Grew: A H
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CHAPTER 3: The Current System TABLE
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CHAPTER 3: The Current System 3.3 G
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CHAPTER 3: The Current System Natio
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CHAPTER 3: The Current System FINAL
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CHAPTER 4: Allocation of General Pu
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Chapter 5: Specific Purpose Payment
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CHAPTER 6: Comparative Fiscal Posit
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CHAPTER 7: Other Federations 7.2 Ve
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CHAPTER 7: Other Federations Sales
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CHAPTER 7: Other Federations The Un
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CHAPTER 7: Other Federations Popula
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CHAPTER 7: Other Federations 7.4 Co
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CHAPTER 7: Other Federations In 200
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CHAPTER 7: Other Federations In add
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CHAPTER 7: Other Federations Compar
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CHAPTER 7: Other Federations FINAL
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CHAPTER 8: Federal Policy Effects o
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CHAPTER 9: Equity Chapter 1 notes t
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CHAPTER 9: Equity Both SPPs and gen
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CHAPTER 9: Equity Table 9.3 shows t
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CHAPTER 9: Equity 9.3 Horizontal di
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CHAPTER 9: Equity Many ways to rais
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CHAPTER 10: Efficiency and Economic
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CHAPTER 11: Simplicity, Transparenc
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Page 240 and 241: GLOSSARY Efficiency: allocative eff
Page 242 and 243: GLOSSARY merit goods (health, educa
Page 244 and 245: FINAL REPORT [234] GLOSSARY
Page 246 and 247: BIBLIOGRAPHY Buchanan, JM 2001, Fis
Page 248 and 249: BIBLIOGRAPHY Government of Victoria
Page 250 and 251: BIBLIOGRAPHY Watts, RL 1999, Compar
Page 252 and 253: INDEX E economic activity / growth
Page 254 and 255: INDEX O other Federations Canada ·
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Garnaut Fitzgerald Review of Commonwealth-State Funding

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