12 April 2001

Fiscal guardians

Ian McAuley, University of Canberra

John Wanna, Joanne Kelly, and John Forster Managing Public Expenditure in Australia Sydney: Allen and Unwin, 2001. ISBN 1-86448-713-5 RRP $35.00.

In times of fiscal stress, power in government generally shifts from those agencies with the big spending budgets to those agencies with a ‘guardian’ role—treasuries, offices of management and budget, and finance departments.

Managing Public Expenditure in Australia is a major case study of this transformation in the Commonwealth. It traces how, over the last quarter century, first Treasury and then the Department of Finance, rose to power in the Canberra pecking order. Finance reached its zenith in the mid nineties, before handing many of its evaluative functions over to spending agencies. Finance delegated this power to spending agencies only once it had tied them down to tight spending caps and a rigid performance management framework.

The book covers the processes of public expenditure management and accounting in government. It is underpinned by thorough documentary research, and interviews with key political and bureaucratic players. These give the work an intimate perspective on some of the major events in the era. It takes us through the generally cool relationship between Treasury and the Whitlam Government, which came to a head when the Government tried to bypass the Treasury’s normal channels for raising loans and go to the petro-dollar intermediary Tirath Khemlani—an event which triggered the downfall of the Whitlam Government. If Treasury expected thanks for its role in Whitlam’s downfall, however, it got no gratitude from Malcolm Fraser, who, a year and four days after the dismissal, split the Department in two, Finance and Treasury—the former to take on the tasks of budget and expenditure management, and the latter to take on the role of economic advice. And in case we think the tension between Fraser and Howard is a recent development, we are reminded of the serious conflict between the expansionist Prime Minister Fraser and the conservative Treasurer Howard in framing the 1982–83 Budget.

The guardians of the public purse, however, have stood above partisan struggles. They set themselves apart from other public servants, and have not recoiled from making sure politicians understand where power lies. Describing Treasury in the early 70s, before the split, Wanna and his colleagues give a strong insight into the Treasury culture, observing that “Treasury regarded itself as a permanent institution of state, whereas elected governments came and went.”

The guardians of the public purse have not recoiled from making sure politicians understand where power lies.

Wanna, Kelly and Forster take us through the Commonwealth’s administrative reforms, starting with the Royal Commission on Australian Government Administration (the Coombs Report), to the Howard Government’s National Commission of Audit and Charter of Budgetary Honesty Act. They show how the growth in the power of the Department of Finance has been incremental, almost accidental. They trace how Finance made the best of the split, transforming its role from the technocratic functions of accounting and budgeting to the directive role of imposing budgetary and planning discipline on departments and agencies. In this transformation, the main mechanism used by Finance was the forward estimates process. This started as a crude back-of-the-envelope forecast to make three-year projections of budgetary outlays. By the mid 90s it had been imposed on spending agencies as a tight medium term budgetary control mechanism, extending the reach of expenditure control from one to three years. Fraser may have intended the split to have strengthened the hand of Treasury, but Finance, with its control of financial management, had a stronger set of levers than Treasury, with its much weaker levers of policy advice. This power grab by Finance helps explain how budgetary and expenditure management have come to dominate, perhaps even displace, economic management. (As an ironic, aside the authors show how Treasury has found its policy advice function hard to justify in the performance management framework created by Finance. In this framework, government agencies have to show their results in terms of “outcomes” and “outputs”, which has always been difficult for policy departments.)

While there were some bold initiatives, most reforms have been slow and laborious. For example, it took the best part of ten years for the government to abandon line item controls—those irritating input based controls which specified just what departments could spend on postage, domestic travel and thirty or so other detailed expenditure items. (Woe to the bureaucrat who overspent on telephones but underspent on overtime.) From the early 1980s, most public servants—including those in Finance—saw that line item controls were past their use-by date. They were clearly in favour of replacing these controls with the more rational mechanism of program budgeting, which would see funds appropriated to government programs rather than to line-item inputs. But after many attempts, the Commonwealth has still not gone to program budgeting; rather it has opted for portfolio and agency budgeting, which gives ministers and agencies some flexibility for re-allocation between programs and removes some of the detailed program oversight once exercised by Finance.

Budgetary and expenditure management have come to dominate, perhaps even displace, economic management.

Those seeking analysis of the underlying trends in public expenditure will need to look beyond this work. It is largely confined to those expenditures which pass through the budget, and the operation of the main agencies, such as Cabinet’s Expenditure Review Committee. It does not look at what Naomi Caiden calls the “privatization of taxes”—the shift of government functions on to health insurers, superannuation funds, and private service providers. Nor does it analyse the costs and unintended consequences of expenditure control, such as the effects on users of government programs, or the transaction costs and allocative distortions resulting from contracting out. It does not take into account other agencies of economic influence in the Commonwealth, such as the Audit Office, the Productivity Commission, the Economic Planning Advisory Council (an important counterweight to Treasury) and the Industry Department. This focus, in itself, is instructive, for it confirms the narrowness of economic thinking in Canberra; responsibility for resource allocation has given way to a narrow financial concern with expenditure management.

Similarly, the revenue side of the budget is rarely mentioned, and there is little mention of tax expenditures. True to its title, it concentrates on the mechanics and tribal politics of the expenditure side of the budgetary process and the associated spending controls—providing a view from the Parliamentary Triangle. It is up to the reader to infer how this budgetary and fiscal perspective has come to dominate policy making in Canberra, to the exclusion of broader economic considerations.

In its detail, the work overlooks one of the most overwhelming budgetary pressures in Australia—as in other countries—which has been the growth of welfare payments, offset by declines in other outlays. Wanna and his colleagues correctly point out that budgetary constraint has indeed been difficult, whatever the ideological complexion of the government. In an aggregate sense this is correct, but many areas of public expenditure have been cut significantly. The historical tables in annual editions of Budget Paper #1 show an unrelenting growth in budget-funded personal transfers, such as pensions and unemployment benefits, which have risen from 5 percent of GDP to 10 percent of GDP over the last 25 years. This growth has been at the expense of most other programs funded by or through the Commonwealth—education, research, infrastructure, environmental protection, economic services, defence—where expenditures have declined from around 16 percent of GDP to 10 percent of GDP over the same period. Although these changes have been incremental year to year, their effects have been profound. There will almost certainly be pressure on public budgets to halt or reverse this trend; governments will find it difficult to sustain living standards with ever increasing personal transfer payments while letting the supply of public goods deteriorate.

Neoliberalism has permanently triumphed, sweeping aside economically rational concepts such as public goods theory.

The strength of this work is in description and detail. Its few excursions into analysis, towards the end, are less than convincing. It assumes, as an article of faith, a political and economic imperative to limit the size of government. To say “Australian governments have, like many of their OECD counterparts, been forced by electoral pressures to curb spending” is a bold statement. One would expect at least some discussion of this point, and evidence to support it, particularly in a work which is otherwise so well documented. Similarly, the authors state that “there are social and political benefits from ongoing expenditure cutting processes”, without any argument or background evidence. Perhaps they assume that neoliberalism has permanently triumphed over other public ideas, sweeping aside economically rational concepts such as public goods theory. Such an assumption is possibly a by-product of a long period of intimate dealings with Canberra’s guardians of public finance.

This ideological bias should not put readers off. (The book’s editing, however, may make life hard for readers; there are many typographical errors, and a little more attention from the publisher to duplicated content could have shortened the book somewhat.) The descriptive chapters, which form the bulk of the work, should be compulsory reading for any newly appointed public servant, and for those newly elected politicians who will be heading to Canberra later this year. Those who want to make their mark in government need to understand where power lies in Canberra and the strength of bureaucratic traditions. Wanna, Kelly and Forster have made a significant and welcome contribution to our understanding of public administration.

Ian McAuley is Lecturer in Public Sector Finance at The University of Canberra.

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