Commentary 2nd May 2014

Commission of Audit report released: experts respond

The National Commission of Audit has made 86 recommendationswith a focus on the federal government's 15 biggest and fastest-growing areas of spending. The result is proposals for sweeping spending cuts for the government to consider for its May 13 budget, ranging from the politically possible to the crazy brave.

Private health
Professor Anthony Harris, Director of the Centre for Health Economics at Monash University

The Commission recommends reintroducing a private health insurance market for primary care and having a mandatory private insurance replacement for Medicare for the better off.

In other words, it recommends replacing Medicare with a competitive insurance market where premiums are set according to the individual risk and characteristics such as smoking or weight.

The aim appears to be to reduce government spending rather than the cost of the health system – as it is far from clear how these proposed reforms would do anything other than increase total expenditure on health.

What is missing in the Commission's rationale is the recognition (widespread among economic analysts) that private health insurance markets are inherently inefficient, and that government provision of insurance is both cheaper and fairer. The Commission admits to some of this when it says:

where a third party, such as the government or an insurer, is paying for a service, moral hazard can lead providers and consumers to use more services than would otherwise be demanded.

This is part of the story. But so is private health insurers' inability to charge a fair premium when risks are unknown and the same coverage is needed for everyone who is sick, irrespective of income.

Yet the commission comes to the conclusion that allowing health funds to expand their coverage to primary care settings will improve the health of Australians at lower cost than public funding of Medicare. No evidence is provided for this.

Allowing private insurance to cover primary care services will not only lead more services being used, but will inevitably result in a rise in medical fees. All the evidence suggests that a single national insurer is cheaper to administer and is better able to control costs.

The proposal runs counter to the basic principle of Medicare and similar public health care systems: that we want the poor to have the same high quality care and attention as the rich, paid for in fair way.

A private insurance system will inevitably be more expensive; even if it reduces out-of-pocket costs for care, it will result in more, not less, service use and expenditure. It might reduce government expenditure, but it will increase total expenditure on health as a proportion of GDP at a time when hysteria about that ratio seems to have reached fever pitch.

This comment has previously appeared on The Conversation.

Public Policy
Dr Veronica Sheen, Research Associate, School of Social Sciences at Monash University

As the Commission of Audit says itself, it has not dealt extensively with taxation issues, which are the subject of a forthcoming White Paper. So we have a set of proposals focused on government expenditure and ancillary recommendations related to state-Commonwealth responsibilities and more efficiency in government agencies and services. This means that the big numbers on social spending are very compelling outside a broader context in relation to revenue.

There have been long-term problems with some aspects of pension eligibility. My long-standing view from work in this policy area has been that it is reasonable with the burgeoning prices of capital city housing, which has particularly benefited older home owners, that this be included in the means test through home equity conversion for high value homes.

The recommendation on lifting the pension age to 70 over a long period to 2053 is better than some reports that it would be lifted to 70 as early as 2030. This gives time for a better adjustment across the working-age population.

However, the recommendation to change indexing arrangements is of concern. For those solely reliant on an age pension and with a low asset base, it is still a low payment.

The recommendation on reducing growth of the minimum wage for low-skilled workers sets a benchmark of a minimum wage at 44 per cent of Average Weekly Earnings. The minimum wage is currently 43.3 per cent of the average full time wage so the report's recommendations would pull the minimum wage lower than this using a AWE benchmark. Ten years ago the minimum wage was 48.2 per cent of average full time wages , so the report's recommendations would consolidate further erosion of living standards for those on the lowest wages.

The recommendation is also set against increasing the withdrawal rate of the income test for unemployment payments to make Newstart even more unattractive as a payment. They include measures to force young unemployed people to move to areas with better job prospects. There are no recommendations to improve the very low Newstart payment.

The Carer Payment and Disability Support Pension are sensitive areas of public expenditure. I have never seen any evidence that there is large-scale or inappropriate reliance on these payments, so I am sceptical about the relevant recommendations.

This comment has previously appeared on The Conversation.