Speech by The Hon Lindsay Tanner MP
Minister for Finance and Deregulation
Thursday 5 June 2008, Canberra
Good morning and thank you for inviting me to speak at CEDA’s 2008 State of the Nation conference. I’d like to acknowledge the important contribution CEDA makes to our national economic debate. Today I will outline two important reforms taking place within my portfolio of Finance and Deregulation. These reforms together form a significant part of my Department’s workload for the remainder of the year. A little later on I will talk about the Government’s Expenditure Review Taskforce – which we have dubbed ‘Razor Gang II’ – and the Government’s approach to achieving ongoing efficiencies in government spending.
First I’d like to outline a set of reforms that have received little media attention but which are extremely important to the transparency of government financial information. These are our ‘Operation Sunlight’ reforms, designed to improve the quality of Budget information provided to the public generally, and the economics profession in particular.
In 2006 I undertook significant consultation around the issue of Budget transparency, producing the first ‘Operation Sunlight’ discussion paper setting out Labor’s agenda for reforming the presentation of financial information.
The final years of the Howard Government put the spotlight on the need for reform. Under the Coalition, transparency reached a low ebb. From ‘Children Overboard’ to the AWB, the cover-ups just kept coming.
It was therefore no surprise that this pattern of behaviour was reflected in Budget reporting. Budget decisions were often hidden or unavailable. Descriptions of programs and services were often so broad as to be useless.
The massive growth in government spending during the last years of the Howard Government appears to have created significant incentives to make the budget papers as hard to read as possible.
Operation Sunlight then is a very important set of budget and public sector finance reforms. I am determined to eliminate the trickery that has enshrouded budget information under the previous Government. I am committed to ensuring that the Government provides more detailed and better quality financial information.
The key objectives of Operation Sunlight are to:
Since coming to office my department has been working tirelessly on implementing this reform process. I’d like just to touch on how we are meeting these objectives through useful, practical reforms.
An important first step in Operation Sunlight was implemented in December 2007 when I released the Consolidated Financial Statements for 2006‑07. For the first time the Goods and Services Tax (GST) was recognised as an Australian Government tax.
Since 2000, the previous Howard Government had claimed that the GST was a state tax, in an attempt to disguise the full extent of increases in tax revenue. This treatment was inconsistent with accounting standards and Australian Bureau of Statistics wishes.
Commencing in the last Budget, the GST will now not be hidden or misrepresented as a state tax. The grants to the states will also be disclosed as Commonwealth expenses.
As a result of the correct treatment of the GST and associated payments to the States, the Commonwealth Auditor‑General issued an unqualified audit report on the 2006-07 Consolidated Financial Statements. This is the first unqualified CFS since 2000-01.
The Government has also made other significant steps forward with greater transparency provided in the 2008-09 Budget Papers.
We have brought previously disparate and disaggregated information together in one place, making key financial facts easier to find.
For example, in Budget Paper No. 1 the Government has produced a single set of budgeted financial statements based on both Government Financial Statistics (GFS) and Australian accounting standards, using a new harmonised accounting standard known as AASB1049, Whole of Government and General Government Sector Financial Reporting.
As a result, Statements 2, 9 and 10 in the 2007-08 Budget have now been replaced by a single financial statement.
We have also provided significantly enhanced program (or sub functional) information in Statement 6.
Changes have been made to Budget Paper 4 and the way special appropriations and special accounts are presented.
Special appropriations account for almost 80 per cent of all government funding and provide money for particular purposes, such as social security payments or industry assistance. While special appropriations form such a large part of Government spending, it has not before now been easy to see what they are or where they are spent.
Budget Paper 4 has introduced a summary of estimated expenses from special appropriations across agencies to provide this clear picture, and provide a simple basis to compare with agency Annual Reports and the details of actual expenditure.
A register of the special accounts held by agencies has also been included. These are what used to be commonly known as Trust Accounts. This information will be further improved in 2009-10 with details of estimated expenditure against special accounts to be added to Budget Paper 4.
We have also improved the presentation of information in agency Portfolio Budget Statements (PBS). The statements have been fundamentally redesigned, streamlining the format and removing duplication but increasing transparency.
The strategic focus of the PBS has been enhanced. The PBS now includes a Strategic Direction statement, providing the reader with a brief overview of the agency and its strategic intent, the strategies to be implemented, and the goals and results to be pursued in the budget year.
We have also introduced into the PBS an Agency Resource Statement, providing a consolidated list of all of the resources available for use by an agency during the relevant financial year.
We have renewed the emphasis on performance information. Agencies are required to provide details of their key performance indicators and targets – not only what they are planning to do, but a basis for assessing the progress and effectiveness of agency efforts, something that can then be explained in agency Annual Reports.
Another key plank of Operation Sunlight is our focus on the efficacy and appropriateness of outcomes under the outcomes and outputs framework.
The Budget is structured around outcomes and outputs. Money is spent on outcomes while outputs sit under the outcomes.
It is clear that the shift from inputs to outcomes and outputs has not fully achieved the intended goal of greater focus on program results.
Reporting on outcomes is inadequate and some outcomes are so broad and general as to be virtually meaningless for budget accounting purposes.
My department has commenced a review of all outcomes and will report back to me for consideration in the 2009-10 Budget. This review will seek to improve the specificity of outcomes and their consistency across government – restoring an appropriate focus on tangible and measurable outcomes.
We are also actively considering reforming accrual based funding of agencies.
At present, agencies receive funding for non-cash costs in the financial year in which the cost is incurred.
The objective of this approach was to provide signals and incentives for agencies to manage their assets and liabilities efficiently through accounting for the full cost of implementing government decisions – for example, the cost of accrued employee entitlements and depreciation expenses.
However, the lack of transparency of accrual appropriations and use of these funds for purposes other than that for which they were appropriated – so called ‘hollow logs’ – calls the current operation of this framework into some doubt.
Agencies are currently required to prepare an income statement that is presented on a profit or loss basis.
But the notion of profits and losses are not necessarily a good indicator of a public sector agency’s financial health. In reality, many of the reasons for an agency incurring a loss are technical, such as recording of transactions between agencies or rephasing of project timings.
The adoption of a net cost of services presentation of agency financial information is under active consideration. Focussing on the full operating cost of an agency will provide more useful and relevant information to Government and stakeholders. Government’s focus should be on the cost of public services, not some notional idea of profits.
The government does not presume a monopoly on wisdom when it comes to reform of budget and financial information. We are prepared to listen to the views of others with an interest in improving the transparency and management of public funds. In fact, we invite those views.
We have asked Senator Andrew Murray to undertake a broad review of budget transparency, including Operation Sunlight. Senator Murray’s review will consider the issues outlined in the original Operation Sunlight paper and review options for further reform.
Senator Murray will provide a final report before 30 June 2008 with further suggestions for consideration.
It is important that Operation Sunlight not be seen as an end in itself but as a foundation for reform in this area. It is also important that the reforms within Operation Sunlight are real improvements and the benefits clearly outweigh the costs.
We are confident that reforms announced to date, along with further reforms to come, will produce real dividends for the public and the parliament in terms of the accountability, transparency and consistency of budget information.
Our Operation Sunlight objectives dovetail nicely with our commitment to review government spending through Razor Gang II.
Operation Sunlight is in many ways directed at making it easier to identify government waste and excess. Razor Gang II is about eliminating that waste as well as running government better.
The Labor party has a strong history of conducting Razor Gang processes on coming to office. In 1973 the Whitlam Government set up a taskforce headed by Nugget Coombs to review the continuing expenditure programs that it had inherited from its predecessors. This approach was repeated by the Hawke Government in 1983 with a major savings statement complementing a major reform agenda.
Our decision to conduct a comprehensive review of Government expenditure in two stages was announced in December 2007.
The first stage – Razor Gang I – delivered $33 billion in cash savings over four years in the Budget, including $5.7 billion in savings in 2008-09 in addition to the $1.6 billion identified during the election campaign.
It has helped us to cut real growth in government spending from 5.2 per cent in 2007-08 to 1.1 per cent in 2008-09.
To achieve this, the Government better targeted government assistance and cut ineffective programs through measures such as: introducing a means test on the baby bonus to better target family assistance - $354 million over four years; ceasing the flawed Commercial Ready Program - $707.2 million over four years; abolishing the Access Card project - $1.2 billion over five years; and imposing an additional 2 per cent efficiency dividend on the public service - $1.8 billion over five years.
In part, we are doing this to bring fiscal discipline at a time when the international environment is uncertain, the domestic economy is running up against capacity constraints and inflationary pressure is growing. This week’s National Account figures, while reassuring, showed those pressures are still real.
I’ve talked often about how the Howard Government completely lost control over government spending when it was in office.
The facts show that by the end of its term the Howard Government had simply given up on managing public finances in a fiscally responsible manner.
Savings measures as a proportion of new Budget measures fell below 5 per cent in 2003 and were almost zero thereafter. Spending on government advertising in the former government’s last 16 months in office amounted to an extraordinary $457 million.
Commonwealth grants grew from 12,006 grants worth $729 million in 2004 to a mind-blowing 49,060 grants worth more than $4.5 billion in 2007.
30,700 of the 49,060 grants award in 2007 were for an amount under $5,000, creating huge administrative costs.
The second stage of our Razor Gang process is directed at tackling this sort of structural waste, built up over the long period of the former government’s economic mismanagement.
Razor Gang II is also about meeting our commitment to make the most efficient use of taxpayers’ dollars; to find savings that can be redirected to areas of genuine and immediate priority or that can be returned to the budget to improve the bottom line and keep downward pressure on inflation and interest rates.
We are now in the process of identifying areas of government expenditure where there is scope to improve the efficiency and effectiveness of programs and services.
There is a tendency for program structures, their process requirements and administrative arrangements to become increasingly complex over time, and there is a good case for running a fresh eye over these activities on a regular basis.
The Razor Gang II special taskforce has been formed in my Department. The taskforce also has the capacity to draw in independent reviewers and advisers on particular issues as required.
The taskforce will work together with portfolio departments and agencies, and central agencies, to analyse and advise the Government on opportunities and options for improvements in expenditure in a range of areas.
Most of this work will take place over the remainder of the year. It will also be used to inform our 2009-10 Budget deliberations. Of course, some of the more complex issues may require a longer timeframe to finalise.
Because of the unknowns we face around the scale of our expenditure review we have not set a formal savings target. Our benchmark is the goal of improving the quality of Government expenditure and its outcomes.
Our commitment to the Razor Gang process stems most fundamentally from our understanding of the high opportunity cost of poor government decisions.
Budgets are about choices. Every dollar a Government spends is a dollar that a family or individual does not have to spend as they wish. It’s a dollar that won’t be directly creating jobs in the private sector.
While through Operation Sunlight we are taking steps to improve the transparency and accountability of public expenditure, the Razor Gang process seeks to ensure that public funding is allocated to maximise the benefits to the Australian community and to minimise wasted resources and duplicated effort.
These two streams of activity represent an approach that is based on well coordinated, financially responsible and sustainable economic management; an approach that is very much in line with the aims of CEDA and the aims of this conference.
Thank you.
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