Tag Archives: neoliberalism

Social Services and Energy Distribution: The Treatment of Surpluses and Profits in Pseudo Markets

Arising from neoliberalism’s obsession to not just analyse the world in market terms, but to make the world into a market, governments in Australia and elsewhere have privatised or outsourced a range of services which had previously been provided by government departments or authorities. South Australia followed this ideological venture in a range of areas, but in this post I simply want to focus on two examples: social service provision and the electricity distribution network.

While the two industries are obviously different, in both cases there was an attempt to mimic or impose market discipline where there was no competition and no real market. Social services are a government monopsony where service users are not the customers so the theoretical link between utility, market demand and price is broken, while energy distribution networks are a natural and legislated monopoly.

Much could be written about the structures and regulation of the “markets” that were established, but I want to focus on just one aspect: the inconsistency in the treatment of profit. This treatment has consequences for social service delivery and energy prices, and ultimately therefore, for equality.

Social Services

The provision of social services, such child and family support, financial counselling, community health, housing and homelessness support, addiction help, and disability services are an essential part of a government’s role in a modern society. But the neoliberal vision and the potential to cut costs by outsourcing services to organisations with lower pay or less regulation led to the creation of pseudo-markets where charities and not-for-profit (NFP) organisations (and some private companies) periodically bid for government tenders to provide services. The successful tenderer is then contracted to provide services at the agreed price, with the government apparently happy in the knowledge that the competition between tenders has ensured value for money.

Heading text from SA government contracts for social services. The terms prevent surplus accumulation.

There are some good reasons for government outsourcing of some social services (and much hubris in relation others), but the treatment of the cost of services and profit in the South Australian government contracts is curious. The government holds most of the cards in any contract negotiation, and generally does not allow for an operational surplus in a contract price. Further, given that the government pays for service provision in advance, it wants to ensure that the money is spent on the services it paid for. And so, the standard SA government contract with NFP service providers has a clause (10) allowing the government to require repayment of any advanced funding which has not been expended in a given year. While there is flexibility for the government not to require repayment, some departments aggressively pursue such repayment.

At best this is a lop-sided contract, with one party (the government) agreeing a price for the provision of a service, and then reducing that price if the service provider manages to make savings – even though the service has been provided as agreed. Despite government rhetoric of outcome-based approaches, the clawing back of unexpended funds is completely input-focused.

However, the ramifications are broader because the lack of operational surpluses and the claw-back of funding means that NFPs struggle to find surpluses to build robust balance sheets and invest in organisational sustainability and development. It is then no surprise that the sector is characterised by an under-investment in technology (as reported in multiple annual surveys) and by short-horizons with a reliance on the next government contract to maintain staff and services.

To be clear, the fact that organisations are not-for-profit does not mean that they can’t lawfully or shouldn’t make a surplus on any service or in any year – it simply means that any surplus has to be put back in to the organisation and can’t be allocated to members as a dividend or other profit distribution. However, the contractual limitations on building and keeping such operational surpluses is detrimental to the sustainability of NFPs and stops them providing more and better services to the people who rely on them.

Electricity Distribution

The pseudo-market created in energy distribution is quite different. By contrast to the government monopsony in social services, the energy companies who bought the privatised energy networks operate in a more standard business framework with the cost of services being paid for by energy consumers (accounting for about 40% of energy bills). However, because the networks have monopoly power, their operations are regulated by laws which limit the aggregate revenue they can get from consumers.

As I have noted in a previous post, the calculation of this aggregate is complex and contested, but it is theoretically based on the cost of service provision, including an agreed rate of return on capital (i.e. profit) – with the regulator determining what costs and profit rates are appropriate.

This allowance of a return on capital contrasts to social service provision in that an agreed rate of profit is viewed as a normal cost of service provision – a cost not usually allowed in NFP contracting (noting that, in theory at least, both have separate allowances for administrative overheads). The result of this is that these private companies can accumulate profit to re-invest to build the company and to distribute to shareholders in a way that NFPs can’t.

However, the difference does not stop there. As I have reported previously, the Institute for Energy Economics and Financial Analysis has produced reports highlighting the “supernormal” profits energy distribution companies have made when their actual costs have come in below the costs agreed by the regulator. In 2022, this amounted to $199m for SA Power Networks and around $2bn across all network providers nationally. While the differences in estimated and actual costs may be factored into future regulatory determinations, this money is not immediately clawed back by the regulator or consumer – indeed, there is a whole incentive scheme built in to the cost calculation to encourage such cost-savings.

A Modest Proposal

There is no doubt that NFP service providers would love to be able to keep their operational savings and surpluses to reinvest in their organisation and services, or even to have an incentive system which mirrored that which enables energy networks to benefit from cost savings.

For governments to be consistent, they should either allow NFP service providers to retain profit (i.e. money not spent when they have provided the agreed services) as per the energy regulation, or force energy networks to refund to customers the above-regulated profits when their costs of service provision are lower than the regulated amount. Energy network owners would still be better off than social service NFPs as the former would still get their guaranteed return on capital, but in relation to the unexpected savings and surpluses, it is a simple proposition that what is good for the goose is good for the gander. But such outcomes are about power (of the political economic kind), not policy, and I suspect in this case it is energy consumers who will continue to be plucked.

If Culture Is Not An Industry, What About Social Service?

Justin O’Connor’s book, Culture is not an Industry, critiques the arts sector embrace of the description of itself as a “creative industry”. The idea and initial adoption was a pragmatic attempt to gain political legitimacy and funding, but it came at a time (in England under Tony Blair, and rolling out from there) when neoliberalism had undone all the structures and legitimacy of industry planning. Accordingly, the creative industry approach commodified culture and functionalised it without arresting any of the impoverishment of art/culture (both in public standing and artists’ livelihood).

I know very little about art and culture, so I do not want to review O’Connor’s book here. Rather, I want to reflect on the relevance of the issues raised to the social service sector where I work.

Book Cover: Justin O'Connor, Culture is not an Industry: Reclaiming art and culture for the common good

Issues in Common

The creative industries frame sees art and cultural work as just one form of “creativity” alongside commercial knowledge creation areas. As O’Connor notes, the creative industry workforce figures drop by more than half when software and industrial design are excluded, and the mantra of creative industries has done little to protect or promote actual cultural industries (live and recorded music, films, games, books, TV and radio, newspapers, theatre, etc). There was never more than token recognition of the unique contribution of art and culture to place, community and the economy, there was no increase in public funding, and art and cultural production became increasingly dominated by the global monopolies of platform capitalism. The result has been a diminishing of creative autonomy, remuneration and security of actual cultural workers.

For its part, the boundaries of the not-for-profit social service sector are similarly hard to define, and the sector often sacrifices the uniqueness of its community base for incorporation into categories which seem to have greater economic importance. For instance, one peak body adopts the ABS-defined “health and social assistance” industry data (which includes public hospitals and health system), while another uses ACNC charities data (which includes universities, environmental charities and cultural institutions). This is misleading, and the claims of economic importance get little political traction anyway.

The parallels in the positioning of the arts and social service sectors can be seen clearly in the following from O’Connor. I have simply inserted alternative text in brackets.

“Anyone familiar with the arts and cultural [social service] sector will know its hand-to-mouth, cunning pragmatism, where one renders to Caesar whatever Caesar wants if it means getting that grant. The grant you need to survive. Given the antipathy to cultural [welfare] funding by many governments, many are content to huddle under the protective umbrella of the creative economy [health and social assistance industry classification], with all those jobs and wealth and innovation metrics, simply in order to keep their heads above water.” [p. 200]

The problem is not simply the need to render to Caesar endless and largely meaningless quantitative data on social and economic impact, it is that this approach fundamentally misunderstands and perverts the mission of the sectors. For O’Connor this means seeing and valuing arts and culture primarily as a contributor to economic growth, rather than as an essential expression of the human experience and a facilitator of a shared cultural citizenship. For the social service sector, it facilitates a model of top-down service provision, rather than a broader agenda of community development and advocacy for structural change.

For both culture and for social service, the embrace of an economic model comes at a cost.

Neoliberalism and Differences in Sector Experiences

For all the commonality above, the arts and social service sector have had a very different experience of neoliberalism’s hollowing-out of the state and abandonment of the public provision of goods and services. These processes impoverished arts and culture, and left cultural workers more precarious, but the not-for-profit social services sector massively increased with the outsourcing of government services (although arguably the demand for and complexity of service provision also increased with the withdrawal of public housing, cuts to public services and the impoverishment of social security payments).

But the differences between the sectors are not just about size.

Another key strand of O’Connor’s book is the analysis of neoliberalism’s privatisation and individualisation of culture. The marketisation of culture along with the growth of platform capitalism leaves us now with mass consumption of cultural product via Netflix, Disney etc. The household, rather than public spaces, become the primary place of cultural consumption as part of a broader neoliberal shift from mass consumption (public goods) to personalised choice (private goods). This shift is based on a false premiss (as even private consumption is socially constructed) and it is damaging to the community as a whole.

This shift is also evident in social services, although the issues and experience may be very different. The much-heralded NDIS is exactly that sort of shift, from the provision of public and institutionalised disability services to a model of service provision as a private good “purchased” by the recipient (or their advisors). The same could be said of the move from institutional aged care to the increased provision of services at home. These systems may not be perfect, but were a necessary departure from their oppressive predecessors.

Of course one should not push this analysis too far. These aged and disability services remain publicly funded welfare supports, and in both culture and social service sectors there has been a common shift from an intrinsic value to a transactional one. Further, as with creative industries, the shift to the consumer model of social service has enabled private profit making and the construction of NFPs as pseudo-corporations – with similar precarious results for workers.

In short, neoliberalism’s reshaping of the cultural sector provides a useful window into what is happening in social services, but the impacts can’t simply be cut-and-pasted from O’Connor’s analysis.

Universality and Social Service Sector Advocacy

The final point I want to consider arises from the above discussion and O’Connor’s passionate advocacy for the provision of social infrastructure and universal basic services (housing, health, education, welfare and transport). This draws on Foundational Economy scholarship that argues that people’s lives and household liveability is not simply based on the market or cash incomes. Rather it is underpinned by three pillars: household income, essential services, and social and cultural infrastructure.

Foundational Economy Diagram of the three pillars of household liveability: essential services, social infrastructure and disposable income.
(Diagram from the FE Collective, not from O’Connor’s book)

Given this, and his concern about the privatisation and the neoliberal fracturing of culture, O’Connor argues that increasing services or supports in a way that further privileges household consumption at the expense of any wider social connection or solidarity is not an unproblematic advance. Indeed, O’Connor is suspicious of calls for a Universal Basic Income, for a variety of reasons, but including because it replaces social activity (work) with atomised individual activity (consumption).

While decent wages and income supports are obviously important, O’Connor’s argument provides a significant challenge for social service advocacy, which over the last decade or more has been very focused on raising the rate of income support payments like Newstart/Jobseeker.

In a world of limited resources (and even more limited advocacy power), there are real policy choices between income supports, essential services and social and cultural infrastructure. Should we be advocating for more public libraries and public wifi, or simply higher incomes so people can better afford to purchase data and devices? Is government housing support better delivered as direct rent assistance payments or by increasing the provision of public housing? Should we be investing in the “communal luxuries” of theatres and galleries, sports fields, public institutions and public spaces, or simply increasing incomes so people can support their own culture and leisure choices?

I saw some of this tension play out in a recent ACOSS Post-Budget Event. Federal Treasurer Jim Chalmers tried to deflect criticism of the failure to increase JobSeeker by pointing to a range of other budgets measures which would support people on very low incomes. The audience did not buy it and remained focused on income-support payment levels.

Of course, when pressed, our sector would go for the “all of the above” choice avoidance, but in reality, social sector advocacy tends towards income-based solutions to poverty and disadvantage (or small-scale, after-the-fact services) rather than public infrastructure and universal public services. This is not just in what we advocate for, but also how we understand the problem. Our preferred descriptor of “income support” reflects a more individualised focus than the older term of “social security”, while our basic measures of poverty and inequality relate to only to income (e.g. a poverty line of $x per week). This is despite the fact that:

  • the limited data available suggests the inclusion of a range of universal public services as “social transfers in kind” in the income data radically reduces measured inequality, and
  • old ABS data shows that accounting for these service (along with inputed rent) decreases the poverty rate by about two-thirds (from 12% to 3.9% in 2013-14).

This is surely an argument to focus more on collective solutions through universal basic services, rather than only on payments. Yet despite this, and the strength of O’Connor’s arguments, I was surprised that I was still uncomfortable about the universalism and subsequent cost of such service provision. I kept going to the need to provide for the poorest first and to target funding. For instance, free public transport would be a subsidy to middle class office workers, managers and city professionals who can afford weekly tickets. Surely concessions for those on low-incomes would be cheaper and better targeted?

Given that I have just spent three years campaigning for better state government concessions, my head is very much in that income-support space. But O’Connor’s and the foundational economy approach is a useful reminder that a tactical win is not systemic change or the end goal. Some of the best supports we can provide to those with limited income or resources may not be directed to those people at all, but may be about creating better services for all.

Conclusion

I have some quibbles about some of the theoretical propositions in O’Connor’s book, and more questions about the Foundational Economics approach. I may return to these at a later date, but overall I found Culture is not a Creative Industry both readable and challenging. I will be interested to see its reception among arts and cultural practitioners, but for me it was well worth the read for its insights and applicability beyond that space.

Energy Bill Relief and the Inflation Dragon: A Fairy Tale?

Last week the official inflation data came in higher than expected with a 1% rise in the Consumer Price Index (CPI) for the March Quarter (up from 0.6% for the previous quarter). That led to much commentary that it was the end to hopes for a cut in interest rates later this year. Apparently the inflation dragon is yet to be slayed, and, as noted in an earlier post, despite an alleged broadening of its focus, the Reserve Bank still aims its sole and somewhat blunt weapon first and foremost at the dragon.

The concern about the inflation dragon also flows through to the upcoming federal budget. The government is under significant pressure to provide cost of living relief, but its options are limited by the need to avoid contributing to further inflation by spending money or enabling more household expenditure. This is all premised on standard monetary macroeconomics which sees increasing money supply leading to increased demand and (absent proportionate production increases) to inflation.

But since neoliberal economics has seen governments of both political stripes outsource monetary policy (to the RBA), abandon fiscal policy (because higher taxes are bad) and largely ignore direct price controls[1] as means of constraining demand and inflation, how can the government help households without being economically irresponsible?

The Quest

The answer appears to lie in a magical quest to slay the inflation dragon (or at least control it) with a new weapon of “non-inflationary” spending. And in this quest, the government is aided by the good folk at the Australian Bureau of Statistics (ABS) who produce inflation data and some lazy economists who think that the data (the CPI) is the actual thing (inflation). Marx would probably call this data fetishism, but in a post-structural twist on ye olde dragon tale, the quest morphs into slaying not the inflation dragon, but its signifier – the CPI.

Image of the CPI header from the ABS website - but no mention of an inflation dragon.

How does this work and why is it important?

Let’s consider the Energy Bill Relief package announced in the last Federal Budget. It is a prime exemplar of this non-inflationary spending.

In the face of sky-rocketing energy prices, the federal government spent some $1.5bn (matched by state and territory governments) to provide a rebate on electricity bills for low-income households and small businesses. Without the rebate, the ABS estimates that electricity prices would have gone up by 17% since June 2023, rather than the 3.9% increase measured in the CPI. (This is because the CPI measures changes in the prices paid by households, so the government subsidy reduces that price – even if the actual price charged by the energy company has still gone up by the higher amount).

Sidenote: a similar calculation applies to the 15% increase in Commonwealth Rent Assistance in the last budget (totalling $540m this year) which took 1.7 percent points off what would have otherwise been a 9.5% increase in CPI for rent over the last year.

These policies provided welcome relief for low-income households struggling to pay for essential items, and as the data shows, they brought inflation down.

But this is just a mirage. Let’s consider what happens in the real world not defined by CPI.

Electricity Bill Relief v the Inflation Dragon

Ignore for a moment the problem that (at this stage) the energy bill relief is temporary, so electricity prices in the CPI will rise when it runs out. But remember that the package was introduced in the face of massive predicted energy bill increases. So, if a household’s electricity bill was $1,000 (to keep the maths simple) in June 2023, according to the CPI the household would now be paying $1,039 instead of the $1,170 that would apply without the rebate. There is still a cost increase to the household (inflation), but just looking at the bill, the government expenditure has at least constrained the dragon rather than fuelling its inflationary fire.

However, the analysis gets a bit trickier when we look at the household budget more broadly. Without the rebate the energy bill would be higher, but for many low-income households with no spare capacity in their budgets, a substantial rise in electricity prices is paid for by decreasing other consumption (often food because it is a more flexible expenditure). In that case, the total household expenditure is unchanged and the absence of the rebate does not increase demand or inflationary pressure in the economy – it is just shifts demand from food to electricity. In that context, the energy bill rebate is a good social policy (because the household can afford food), but it would have no impact on the inflationary pressure generated by household demand.  

That said, some households who received the energy bill rebate would have some savings or savings capacity (not least because the relief was poorly targeted). The increased cost of electricity could be met by those savings, or simply spending more and saving less in the budget. Either way, the total household expenditure would increase, and as this money flowed into the economy, it would increase demand and inflation.

While the energy bill rebate appears to lower inflation when we just look at the electricity bill (as the CPI does), when we look at the household more broadly it may have little impact or may fuel inflationary pressures.

The Macro-economy and the Inflation Dragon

But dragons fly higher than houses and it is only at the macro level that we see the inflationary impacts plainly. While in the above example, the household electricity bill went up by $39, the actual bill still went up by $170 and that extra money was paid – by the government. That money ($3bn in total) is out there in the economy. It initially goes to the energy companies, then to suppliers, workers and shareholders and is multiplied through their additional income and expenditure (with leakages for savings and overseas ownership).

All other things being equal (i.e. unless the government taxes back the energy bill relief expenditure, or it cuts spending elsewhere), this is just $3bn that governments are pumping into the economy and in standard economics that adds to demand and potentially to inflation. It is not magically non-inflationary simply because it is invisible in the CPI (which was not designed to capture it).

Just because you can’t see the dragon does not mean that the economy around you is not heating up!

Conclusion

None of this is to say that the Energy Bill Relief rebate (or the increase in rent assistance) were bad policies. They were not bad (notwithstanding the poor targeting of the energy bill relief, and the eligibility restrictions for CRA). Both measures provided much-needed support for people and households in need – I am just unconvinced that they would not add to inflation pressures.

If there is a magic trick to be had in this tale of the inflation dragon, it is not in the designation of some government expenditure as non-inflationary or imagining that restricting CPI is the same as controlling inflation. The real magic is probably in questioning the economic theory of the relationship between money supply, demand and inflation. There are some examples of this (in MMT and in the analysis of profit-led inflation), but that is a story for another day.

[1]              The exception here was the Federal government temporary cap on gas prices, but beyond that, there is no political will for such a controls – witness state and federal governments running a mile from rent freezes or even capping rent increases.

3G Phones, Energy Smart Meters and the Neoliberal Fantasy

Below is a link to an Opinion piece I ghost wrote and which was published today in Adelaide’s online news site, InDaily. It is a critique of the narrowness of industry initiatives and regulatory responses to the impending closure of the 3G mobile network and the roll out of energy smart meters. The response is based almost exclusively around the need to fully inform consumers, rather addressing the fuller needs of consumers and the consequences for people dealing with the technology changes.

While the piece finishes with some implications for how we provide essential services, in a short piece it was impossible to draw out any broader theoretical concerns. However, in the back of my mind was always a critique of neoliberalism.

It is neoliberal ideology that posits people as consumers, makes essential services into commodities and imagines oligopolies as markets. It was in the neoliberal moment of Australian history that energy and telecommunication networks were privatised, and pseudo markets were constructed with rules that reflected the economic fantasy that if consumers are fully informed they will shop around and that this will deliver optimum outcomes. As the article shows,  we are still paying the price for that delusion.

Read the opinion piece here: https://www.indaily.com.au/opinion/2024/04/17/consumers-bear-the-cost-of-essential-service-changes

Image of InDaily page with Opinion piece "Consumers bear the cost of essential service changes"

Who Pays for Public Services?

I was at a meeting last week discussing prices for public transport. One of the government representatives there noted that we needed to be careful about providing concessions on ticket prices because if discounts were too widely available that would limit their revenue and ability to provide services.

At one level this was reasonable response from a departmental officer responsible for service delivery within budget parameters over which they had no control. But at another level, it struck me that it was a statement of a particular political economy and a service delivery model within that political economy. My first thought was that we don’t talk about roads like that: “oh, we can’t reduce motor vehicle registration because we won’t be able to build or maintain roads”.

Of course, vehicle registration fees don’t really pay for roads – no matter how many times motorists yell this at me as they scream past me on my bicycle. Large roads are least partly federally funded (and thus largely funded by income taxes), and most small roads are the work of local councils paid for by rates on property. Even the state government money from vehicle registration does not go directly to roads, it goes into general revenue and is not hypothecated (specifically allocated) to road building and maintenance.

Then again, train and bus tickets do not cover the cost of public transport either. Those services “run at a loss” and are subsidised by taxpayers – although again, (perhaps with the exception of some privately-built expressways) we never talk about roads running at a loss or being “subsidised” by the taxpayer. Yet in theory, we could set vehicle registration to pay the costs of roads. The fact that we don’t do that means that roads and public transport are quite similar in that they are a mix of user-pays charges and tax-payer funded public goods.

The reality is that for both public and private transport, and indeed the provision of any good or service, there are a range of possibilities for how it is provided and paid for. In a sense there is a spectrum with total user pays at one end:  the private market is the most obvious example, but public ownership at this end is also possible (think SA Water which returns a dividend to government). At the other end of the spectrum is the total taxpayer-funded provision of services provided basically for free (think public hospitals or schools). And in between there are all manner of shared-cost options from gap payments and below-cost service charges, to direct grants and subsidies to third-party providers.

Where on this spectrum any particular good or service fits is a political-economic choice. We could provide free public transport to everyone as we provide free roads, or even, as I suggested in a previous post, provide electricity in the way we provide public education. Alternatively, we could construct artificial markets to enable user-pays models for the provision of public services – as we actually have done for electricity. There are reasons why such choices might be made in terms of the characteristics of the good or service (e.g. the relative difficulty/cost of capturing payment and excluding non-payers [very difficult on roads, but easier on public transport], or where monopoly provision is preferable to having multiple competing networks [electricity, water]). However, it is not just a technical issue – because we choose to have free public hospitals and schools as well as private user-pays institutions providing the same or similar services.

There is a significant ideological element in the choice of where on the spectrum we locate a particular service provision. It was social democracy that built the public electricity system, and it was neoliberalism that justified its privatisation. And to return to our original example, it is a neoliberal application of business language to public services that sees public transport as “running at a loss” or its provision being governed by the prices charged (rather than the amount of government funding).

The point here is not how public transport should be funded, but rather that not seeing the bigger picture constrains the policy options available. Rather than a suite of possibilities on the spectrum of public and consumer funding, we see prices for public services being set by a business logic which is arguably foreign, and at least only partially relevant to the provision of those services.

And suddenly, we can’t afford to offer concession tickets on half-empty public transport!