Tag Archives: South Australia

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.

State Tax Reform: A South Australian Perspective

In 2014, I was part of an unusual campaign – to call for increases in state taxes. The SACOSS “Without Taxes, Vital Services Disappear” campaign was a response to the social service sector constantly being told that there was no money to fund the various services and policies to address poverty and disadvantage. This was true in that budgets were in deficit, so the state government was already spending more money than it was getting in through taxes, grants and other income.

Ten years on, the situation has changed. The last state budget brought in an operating surplus for 2023-24 and forecast surpluses across the forward estimates. In this sense, there is money to expand expenditure on addressing poverty and disadvantage, so the issue would seem to be political priority rather than needing to raise taxes and revenue. However, the tax questions remain crucial because, despite the budget surpluses, state debt is increasing and the interest payments on that debt are undermining the state budget.

Opportunity Cost

As SACOSS noted in its analysis of the last state budget, the South Australian government will spend more on interest payments on debt than it will on the Department of Human Services – the department responsible for supporting the most disadvantaged South Australians. The graph below shows the increase interest payments, both in absolute terms and as a proportion of state expenditure.

Graph showing state budget interest expenses going from under 2.25% of state expenditure in 2021-22 to a projected 6.7% in 2027-28.
Source: SA State Budget Papers

The interest payments are growing because of a combination of higher interest rates, and increasing state debt driven by infrastructure spending. Conventional economics would suggest that going in to debt to fund infrastructure is not a problem, and the government argues that the debt is not a problem as the debt-revenue ratio is under control. However, this has always struck me as an apples and oranges comparison. It says little about the capacity to repay the debt or the impact of the debt on the government.

The more important ratio is the cost of debt servicing to total revenue. The red line in the graph above shows that this is increasing as interest rates account for more of the state budget. This inevitably has an opportunity cost as that money is not available to be spent on government services.

This is why the level of debt and deficit matters – not because it shows mismanagement or over-spending, or a need for austerity, but because it constrains the operations of government and their ability to support citizens.

And underlying this is a concern about equality. As I have noted previously, governments have a choice in financing their activity as they can tax or to borrow from those with surplus cash. Taxation represents a flow from those with resources to the common good, whereas borrowing creates a flow from the common treasury to those with capital resources to loan money.

This is not to say that there should never be state debt, but simply to recognise that it comes at a cost – an opportunity cost and a cost to equality. But in light of the rapidly increasing impact on the state budget, there is a fair argument now that we need to raise more state revenue.

Tax Reform Opportunity?

Unfortunately, the record for tax reform in South Australia, at least in terms of increasing taxes or introducing new taxes, is not promising.

The last time there was a broad public review of SA state taxes was in 2015, when the then Labor government released a discussion paper canvassing a range of reform options. The highest profile reform, a proposal to replace conveyance duties with a broad-based property tax – including on owner-occupied housing, was met with a media outcry about a “tax on the family home” (which ignored the fact that conveyance duties are also a tax on the family home). The proposal was ruled out in a matter of days – even before the formal consultation process closed.

Overall, despite the Treasurer publicly welcoming the SACOSS submission (which proposed raising revenue), the 2015 review resulted in the abolition of a range of taxes and decreases in other taxes totalling some $670m in lost revenue over four years to 2018-19 – all in the name of improving the business environment.

Outside of the 2015 review, the record is no more encouraging:

Panel of 8 men speaking at a forum organised by SA Best to oppose tax reform to closing avoidance loophole in land tax aggregation.
Adelaide’s “men of property” at a forum opposing
closing loopholes in land tax aggregation, August 2019.

Of course, over the years there have been changes to rates and thresholds of existing taxes, but these are generally in the direction of tax “relief” rather than revenue raising.

There are two notable exceptions where new revenue-raising taxes have been introduced over the last 20 years. There was the 2017 introduction of the Foreign Ownership Surcharge – a 7% extra stamp duty for foreign owners purchasing real estate, and the point of consumption wagering tax introduced in the 2016-17 state budget. The former had been explicitly rejected in the government’s response to the State Tax Review a year earlier, while the later was flagged but not immediately implemented.

These two examples are telling – not so much because they show that new revenue measures are possible, but because they show the importance of the politics. By definition, the Foreign Ownership Surcharge had no resident vested interests opposed (because they were overseas), while the point-of-consumption wagering tax came at a time when the sports betting industry’s peak body and political lobby was in disarray (and the big companies did not want to risk their own brands in defending registration in tax havens).

Not exactly repeatable examples as a basis for a campaign strategy or a hope of reform.

A similar story could probably be told at the federal level from the experience of mining super-profits taxes, Labor’s 2019 mild capital gains and negative gearing reforms, and more generally in relation to the Henry Tax Review – comprehensive and steeped in Treasury’s market logic and legitimacy, but still largely gathering dust.

Conclusion

The reality is that it is always much easier to oppose a new tax than to pass one. A new or increased tax creates a vested interest in opposition, and they can always find or invent a deserving case study for whom the tax is unfair, or tell us how the tax will cripple the economy. By contrast, the vested interests who will benefit from the tax (the general public who will benefit from government revenue and spending) are too amorphous or too far removed from the specific proposal too mobilise in support.

I think the point of the story above is not to abandon all hope of tax reform and of raising sufficient revenue to fund vital services, but rather to see it as a political exercise rather than a policy one. It will require a long-term shift in public thinking and a mobilisation of political power, not simply a well-researched policy or a polite proposal. It will require political resources to oppose the vested interests, and an appropriate vehicle to drive the change.

In that sense, tax reform is both a part of a bigger project of social democratic renewal and dependent on that project.

Campaigning for Concessions: Reflections on Success and the Bigger Picture

Some time ago, the environment group I worked for engaged in a comparison of the results of campaigning for the protection of land and habitat as against buying tracts of land for conservation. As I recall, the result was pretty stark – buying properties, even with the backing of big philanthropic money, saved far less land from environmental threats (e.g. land clearing, forestry, mining) than could be saved by campaigning to create national parks and/or to stop threatening processes. It was a crude consideration given the complexity of nature conservation, but on a dollar per hectare saved basis, it was not even close. At the time I felt lucky to be working in a campaign organisation.

Now I find myself working in a peak body for a service-provision sector, but I was reminded of those old debates when I reflected on this year’s South Australian state budget. Compared to the environment movement, the social service sector are not great campaigners. Mostly ours is a disempowered sector of professionalised service-providers who do not think in terms of public policy change. Much of what passes for campaigning (although the preferred term is “advocacy”) rarely goes beyond writing to Ministers or responding to government consultations.

A Concessions Campaign

Yet on occasions, I get to contribute to campaign approaches, and in 2021 SACOSS began a campaign to fix the system of South Australian government concessions. Concessions are government subsidies, rebates and payments to help those on low incomes afford essential goods and services, but as our initial State of Concessions report found, the system was fundamentally broken. It included unfair barriers to eligibility, and poverty premiums which meant that those on higher incomes often received greater support than those in most need.

Unlike most sector advocacy, our concessions campaign had a clear path from the beginning. It was not “whinge and pray” advocacy, or a belief that we just need more research and more facts to give to governments. We had a staged plan – what I have been known to call “a plausible path to victory”. It was basic text book stuff, and lots of such plans go wrong. Indeed, it was unusual that this one played-out fairly close to the text book version, but that does not make it magical or unreplicatable.

We began with the research and report showing that the system was broken, but rather than letting the evidence speak (or not), we used the 2022 state election to seek promises for a government review of the system. That was an exercise in publicity and political engagement, not policy. That done, we kept some attention on the issue to see the promise delivered, and then participated in the technical debates and influenced the direction of that review. The goal was always the 2024-25 state budget – a goal happily shared by an engaged Minister and department.

It was not all an inside game, or simply assuming the review would deliver. Given that the Minister was supportive, we directly lobbied other parts of government for funding of the outcomes to improve concessions. We did occasional media commentary to keep the issue in the public (or at least the politicians’) eye, and engaged in opportunistic advocacy in different government processes along the way. All pretty standard stuff, but always with an eye on the formal government process and the campaign strategy.

While the government review proceeded in 2023, we wanted to maintain external momentum – because government processes can bury, as well as facilitate, change. With philanthropic support, we hosted a community panel to consider the issues and feed into the review process. This was an exercise in participatory policy-making which garnered publicity and kept pressure on government, but also ended up substituting for the traditional top-down government consultation.

All up, it was not campaign rocket science, but nor was it mendicancy or reactive submission-writing.

The review resulted in a significant package of measures announced in the 2024-25 South Australian state budget, including:

  • a one-off payment of $243 to existing Cost of Living Concession (CoLC) recipients,
  • one-off discounts for children’s sports fees and school charges for low-income households,
  • doubling the amount of the annual CoLC payment to renters,
  • opening access to more concessions for asylum seekers and share-houses,
  • providing access to more concessions for those in waged poverty,
  • and increasing access and/or payments for some other specialised concessions.
Front cover of State Budget Overview

This amounted to an ongoing $60m increase in expenditure going to people on low incomes, and $130m in one-off payments. At the beginning of the campaign, I would have called $60m for those changes a significant win, even without one-off payments – which will themselves be useful short-term cost of living relief.

Reflections

All that said, these concession changes did not come simply because we campaigned cleverly. Often the best campaigns don’t succeed. While our campaign was broader and more sustained than much sector advocacy in our state, it was still mild and relatively small-scale. And of course we did not get everything we wanted. There were still holes in the government’s package which reflected, in part, our failure to get engagement from a couple of Ministers and departments. Further, the big one-off concession payments announced in the budget were not part of the review or our campaign – but the lasting changes certainly were.

Our campaign could well have come to nothing in different circumstances. Yes, we had the imprimatur of an election promise and a proactive Minister for Human Services driving the review, but the broader political economic context of a “cost of living crisis” was crucial. There was great pressure on the government to “do something” to address the crisis. And when the government needed to act, there was a set of responses where the policy leg-work had been done and could be easily implemented.

[I am sure someone once said that people make history, but not in circumstance of their choosing].

All campaigns need a measure of luck and the right environment, but in this case there was also a fortuitous and useful flow-on. With the government under pressure to address financial pressures on many households, the prior policy leg-work done by the department and prompted by the campaign meant that the government’s cost of living relief package was built around concessions. It was therefore targeted towards those on lower incomes who are likely to be hit hardest by the crisis. That stands in contrast to the federal budget where the energy bill reliefs were delivered to all and sundry, and the bulk of the tax cuts were delivered to – well, it is hard to be polite about the tax cuts, even in their revised form.

I don’t want to get too carried away about a small state-based campaign. Despite the $200m headline, state concession payments are still at the periphery of income distributions, and will make only a marginal difference to households. After all, income and income supports are primarily federal government responsibilities. However, the concession increases are still a win – a distribution from the treasury to those on low incomes. And importantly, I would argue that they will make far more difference to far more households than charity and service provision to what can only ever be a small minority of impacted households.

Bottom Line

It is not that service provision is not important, but the budget win on concessions did remind me of the importance of campaigning. It is why I want to scream every time I hear that I (or at least my money) can change the world “one child at a time” (with said child usually looking forlorn and helpless), or one animal or species (usually cute) at time, or one village at a time. That is the stuff of fundraising and marketing, not of political economy or social change.

Despite it being a hard slog with uncertain and often disappointing outcomes, campaigning for change is crucial because the bottom line is that to end poverty you need to redistribute wealth, not just provide counselling or relief services. To end domestic violence you need to change men’s behaviour, not just provide services to victim-survivors. To end racism, you need to address white privilege and power, not just provide better services to close a gap or support migrant communities.

Of course, we need to fund those services and supports, but we also need social change that will make those services redundant. That said, I know concessions are not revolutionary and systemic change. By definition, they are band-aids on an inequitable system – but the example still makes me (re)believe in campaigning and the possibility of bigger change.

Taxpayers Hiding in Bathrooms: Arts Funding and the Public Good

This week I attended an arts show, I Hide in Bathrooms, as part of the Adelaide Festival. The show was an interesting one-woman performance which traversed difficult issues of death, sorrow, fear and the contradictory feelings of the loss of a loved one. I was not completely engaged, partly for personal reasons, and partly because I thought the big questions raised by the performance focused on a “love of my life” relationship politics that I do not share. But it was a great performance and a show worthy of one of Australia’s major arts festivals.

To be clear, this was not high art – rather, it was independent and experimental theatre from people and organisations that work on shoestring. And despite that, the performance and production values were high, and the content was provocative and important. So what has this got to do with political economy?

The performance I attended was an opening night – so it came with speeches! The Chair of the host organisation, Vitalstatistix, thanked and congratulated the artists and the production team, and then thanked the backers – Brink Theatre, Vitalstatistix, and Arts SA.

All very ordinary – but can we rewind on that? The show was made possible by the collaboration of the publicly-funded Brink Theatre, the publicly-funded Vitalstatistix, the state government’s arts body, Arts SA, and was part of the publicly-funded Adelaide Festival. This is typical of the funding cocktail required to produce modern arts (or other community projects), but what was absent from the acknowledgements was a thank you to the Australian and South Australian taxpayers who backed the project via 4 four different paths.

Alongside the formal acknowledgement of production partners, would it be such a big step to acknowledge that the whole show was made possible by taxpayers’ funding? To acknowledge that it is a privilege and a responsibility to be funded by the community to produce thought-provoking art (a similar privilege/acknowledgement that should sit with the millions of other people who also rely on the public purse in government employment, defence industries, community services or even the big 4 accounting firms!)?

[And yes, my wage is also indirectly funded by the public purse]

But in an arts context, would it be useful to acknowledge the support of the community of taxpayers and ask the audience to bring other people to see the show and appreciate the importance of public arts funding in raising difficult social issues?

To be fair, the speeches I heard were just fairly standard opening night routines, and the content may have been different if the speech was delivered by the CEO, the author of this great piece on the arts venue and the role of “communal luxury”.

But in reality, if we want to continue to support collective activity we need a bigger picture at all the micro-events that owe their existence to taxpayers’ funding. We need to stop treating government bodies as external funders and start acknowledging the web of links (including taxes) to the broader community.

Our taxes pay for so much more than politicians, or even public schools and hospitals. We need people to understand the social and economic poverty of a world with low taxes. We can’t afford taxation to hide in bathrooms!

This may jar with my friends in the Modern Monetary Theory community who view government expenditure as a precursor to and independent of taxes, but as I have argued before, I suspect this is partly economic pedantry. The bigger issue is to agree that a private market will never deliver the breath of human supports and experience we need. Government is essential – not simply as an economic regulator or authoritarian legislature, but as a facilitator of collective goods and services which are essential to a modern social life.

Premier Malinauskas’ “Full Employment” – a dangerous definition

Yesterday (21 February 2024), on ABC Radio National, the South Australian Premier Peter Malinauskas told the country that we have full employment in the state. It is a claim I have heard him make before. Given that I think that full employment is a historical myth, at best an unstable temporary state, and probably unattainable in the long term, I did a quick fact check on the Premier’s statement.

Head shot of Peter Malinauskas

The latest data from the ABS shows that in January 2024, the unemployment rate in South Australia was 3.9%, equating to around 40,000 unemployed people. The underemployment rate was 7.6% of the labour force, which means that there were an additional 75,000 people who were less than fully employed. Further, the proportion of the state’s population who were employed was significantly below the national average, so we probably have an unknown number of unregistered unemployed people.

So, on its face, the Premier’s claim is simply wrong. There are clearly unemployed and underemployed people in SA looking for jobs. We do not have full employment.

At this point a populist would bemoan “lying politicians”, but the Premier was probably relying on the infamous NAIRU, the Non-Accelerating Inflation Rate of Unemployment, to define full employment. The NAIRU is basically the minimum level of unemployment that is not expected to trigger supply constraints and inflation. It is a definition of “desirable” rather than “full” employment, but Malinauskas is not alone in using this as the definition full employment. In fact, such definitions are crucial to current federal policy debates.

The latest review of the Reserve Bank was celebrated for giving the goal of full employment equal status with its inflation management goal – a radical departure from its inflation-focused recent history. However, the RBA’s December 2023 Statement on the Conduct of Monetary Policy makes clear that this full employment is the “maximum level of employment that is consistent with low and stable inflation” (the NAIRU).

As Mike Beggs argued in a recent JAPE article, when the RBA defines full employment as the NAIRU, then the change is essentially meaningless. Economic growth and the existing inflation target will deliver the NAIRU “full employment” (almost by definition) – while actual unemployment will continue.

The Federal Treasurer Jim Chalmers also notes the problem of using the NAIRU as a measure of full employment, saying of the NAIRU:

“While it’s a useful measure, it doesn’t capture the full potential of our workforce and it shouldn’t – and doesn’t – limit the Government’s ambitions for getting more Australians into work.”

Chalmers’ White Paper on future work defines full employment as where anyone who wants a job can get a job without searching for too long.

This is a more common-sense definition, but it is hard to see how we will achieve this full employment if State Premiers and economic institutions like the Reserve Bank use a language which renders unemployed people invisible. Unemployed people simply cease to exist when the NAIRU is translated as full employment.

As a general rule, if you actually want to get unemployed people into work, you probably need first to acknowledge that they exist.

Alternatively, if the reality is that you don’t want or can’t have full employment (in the sense of everyone being able to get a good job), then you might want to find other ways of ensuring unemployed people have access to a dignified life (rather than pretending they don’t exist, or trying to starve them into work with conditional welfare at below-poverty-line levels).

Either way, pretending that unemployment does not exist by adopting a NAIRU definition of full employment is dangerous. It misdirects political debate and shuts down policy options that would deliver better outcomes for unemployed people and the community more broadly.