The myth of new state duplication costs

   Commonwealth Grants Commission figures make it clear that the actual scope for duplication of costs by a new state government is quite limited.  The overwhelming majority of state outlays involve no duplication because they relate directly to the delivery of a service to individuals from a local office and thereby remain the same whether that service is delivered by a large existing state or a new regional one.  
   Through the Grants Commission, the Commonwealth and the States and Territories have gone to considerable effort to determine what “Minimum Administrative Structure” is needed to deliver the core head office functions of a state, including Parliament.  They have also agreed on the cost of this function which is continually updated from year to year.  It is only this “fixed” or overhead cost of a new state government that is duplicated when a new state is formed from part of an existing one.
   Whenever the prospect of a new regional state is mentioned in a public forum it will inevitably attract the trenchant “abolish the states” comments from people who already feel grossly over governed.  Analysis of feedback reveals that most of these people do not actually live in the region that is the subject of the new state proposal and will rarely, if ever, have any need to deal with the new state entity, beyond the purchase of a fishing license while on vacation there.
   More importantly, such views are based entirely on the cost side of the ledger, with no consideration of the very significant savings that can be made when planning, direction and control functions are performed by a smaller, leaner, more focussed organisation that is just 3 hours drive from the service delivery point instead of from a very large, bloated, less focussed organisation some 1600km from the service delivery point. 
   There is even less consideration of the substantial additional benefits that can be gained by local MPs and Departmental Managers who no longer have to spend a great deal of their time outside their core area of responsibility, and discussing issues that are not even relevant to their constituents. The direct causal relationship between increased focus on relevant issues and the quality of solutions and the targeting of responses is also overlooked by the cost fetishists.  
   More importantly, the substantial economic multiplier effect as the funds spent on the new administrative structure recirculate, up to 3.5 times, through the regional economy is also ignored. The new head office operates as a key economic engine in its own right.
 
The 2008/2009 CGC estimate for this duplicated government administrative structure was only $213 million (see para 54 p.110).  http://www.cgc.gov.au/__data/assets/file/0007/18349/2010_Review_final_report_vol_1.pdf The
This figure ranges from $31 per capita in NSW, $52/capita in Qld to $640 in the ACT.  And when spread over the 900,000 people of New North Wales it would be $237/capita and for the 750,000 folks in North Queensland it would be $284/capita.  
   However, the people of any new state already carry their share of the existing state overhead cost so this would be deducted from the projected cost of the new state. So the net cost in New North Wales would be $206/capita and in North Qld it would be $232/capita.  The post secession cost in the rump states of NSW and Qld would go up by $5 and $11/capita respectively.
   Many people in regional Australia would gladly pay this amount to get a government of their own choosing just down the road.  But this is not an actual cost, it is just the target cost that a new state administration must find savings and efficiency gains to offset.  And when one considers that average state outlays are in the order of $10,000 per capita then finding savings and improvements in the other $9,800 worth of  state service delivery is not a particularly daunting task at all.
   In fact, when the $213 million in additional funds are injected into the New North Wales economy it will circulate about 3.5 times and boost local GDP by $747 million and put an average $830 into each person’s pocket.  And 15% of that, or $124/capita, will come back into the new state’s coffers in fees and taxes etc.  And this will further reduce the net duplication cost to only $82/capita.
   In North Qld the same $747 million boost to local GDP will put an average of $996 into each person’s pocket and from this amount $149 will go back into the new state’s coffers to bring the net duplication cost down to $83/capita.
   So before we even begin to look at additional savings and efficiency gains from the other 98% of government service delivery, the average new north welshman has an extra $706 in his pocket after state fees and taxes. His new state has incurred $82 in debt in his name which will need to be serviced by a $4.10 increase in per capita taxes. The North Queenslander will have an extra $847 in his pocket from which his new state will need to take $4.15 in extra fees to service his $83 share of state debt.
Of course, even if the new state government was unable to find a single additional dollar in efficiency gains, and all money currently spent on sending regional staff to capital city wonkshops, and the money spent on sending capital city bureaucrats to the regions to get up to speed on what the locals have known for years, just magically evaporates, then the new state government can simply increase fees and charges on the other $9,800 per capita in services by 0.84 of 1% and that $83 worth of per capita debt will not be borrowed in the first place.
So tell me, are the cost “wallies” looking silly yet?
 
   It is interesting to note that the SEQ government currently pays out $86 million a year to supply locums to regional Doctors, at more than $1,800/day and double the cost of a permanent local GP. But less than 5% of this outlay actually remains in the town where the locum worked. Apart from about $100/day in accomodation and meals, the rest goes traight back to wherever the locum came from (in some cases to New Zealand)
   This money is still classified as the regions share of the financial pie despite the fact that most of it ends up creating additional jobs everywhere but in the region. Just $62 million of this money would cover the remainder of the head office costs of a new North Qld State government, or would train an additional 172 extra medical students.
    The same is taking place in education where, instead of new schools being built by locals, demountable classrooms are built in Ipswich and trucked to the regions. The funds are counted as having been spent in the region, despite the fact that all the jobs and 95% of the additional economic circulation remains in SEQ. In fact, this sort of thing is taking place right across the state budget, and is on a scale that renders the “duplication cost” of a new government in the North completely irrelevant.
    And what is very clear is that the often suggested option of ceding health, education and law and order functions to the Commonwealth and leaving the region without a premier or parliament but with enhanced regional councils would actually exacerbate the leakage of local GDP to the metropolitan economies and speed up the decline of rural areas.
    The “abolish the states” argument is one based solely on the consideration of the raw cost of government with scant regard for the economic multiplier effects of the same government. This is an entirely understandable oversight for regional people who do not see much of this multiplier effect in action but it is impossible to ignore when observed from within the capital region.  What is clear to see is the fact that the major second and third phase circulation of state funds is restricted to about a 3 hour radius of the capital, i.e. between Noosa, Toowoomba and Byron Bay. 
 
   It is a damning indictment of the status quo that the second and third stage circulation of Queensland government outlays produces far more jobs in Northern NSW than it does in regional Queensland. 
 
And in the North Queensland context, this would enable the complete capture of the region’s proper share of GST funds and Commonwealth grants and ensure that the overwhelming majority of second and third phase economic circulation takes place between Cairns, Mackay and Hughenden. But the more state functions are handed to the Commonwealth, the less control the region has over the second and third phase economic circulation from those outlays.  
    The ideal would be for 4 regional entities in the North, three on the coast and one in the west, but the population is too small to do this yet. The federal Constitution deals only with states and such small states would produce some serious distortions in the quotas for House of Reps seats. And implementing constitutional changes to accommodate these problems would require a level of nationwide consensus that is entire orders of magnitude greater than has been achieved over the past 110 years. 
    In practical terms we are stuck with states as the vehicle of reform. But it should also be kept in mind that there is nothing to prevent any parliament of a new state from forming internal sub-regional units, under the direction of the relevant state MP’s from that sub-region, and giving them full control over the allocation of their share of each departmental budget. This would produce an even more equitable distribution of second and third phase economic circulation and reduce the risk of a single concentration of wealth around the new capital. 
    This issue of equitable second and third phase economic circulation is far more important, in both funds involved and economic impact, than the issue of mining royalties etc. In Queensland the state takes a larger portion of it’s mining profits in the form of high rail freight charges, rather than royalties. And it is also clear that Bligh will have sold off this part of the revenue base to the miners themselves long before any new state gets to divide the spoils. So making the distribution of these funds a key part of any devolution campaign will only strengthen the perception amongst southern voters that there is something there to fight over and keep.
 
The economic benefits of creating a completely new, dispersed, economic engine in the form of a regional State government are incontestible. The costs to the rump state are so marginal as to be statisically irrelevant while the reduced pressure on existing metropolitan congestion and lifestyle degradation is obvious.
 
New Regional States are an idea who’s political and economic time has come.
Ian Mott 
 
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About regionalstates

A site for informed discussion on the strengths, weaknesses, risks and opportunities to be gained for regional Australians through the formation of new states within the commonwealth.
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6 Responses to The myth of new state duplication costs

  1. Jim Belshaw says:

    You raise some very worthwhile and interesting points, Ian. I will pick them up in a companion post.

  2. Ian Mott says:

    Thanks, Jim. It is surprising how easy it is to find the additional savings under a new state administration. The SEQ city state currently spends millions on sending Brisbane based bureaucrats all over the regions to bring them up to speed on the situation on the ground. The problem is that these people will then move to a new position, often after less than a year in the job, and they have to incur the same cost all over again to bring the next boofhead up to speed. In a new North Queensland they will all have come up through the local ranks and will already be up to speed.

  3. New England State Campaigner says:

    A great article, thanks Ian. Urlrich Ellis would be proud of your analysis.

    This is another example of the town spending studies. These show that every $1 spent in a family business of a regional urban centre generates another $7 of turnover in the town as the family spends the profit component of their sales to purchase the goods and services required for living from other local family businesses.

    This turnover effect is completely lost when purchases are made in national or multinational corporate businesses (supermarkets etc) because the profits are passed immediately to the proprietors in the capital cities or overseas, and so bypass the local community.

    (Marx identified the bypass effect over 100 years ago for Austrian regional banks).

    So, devolution of sovereignty from the present states to new autonomous regional governments makes sound economic sense. Moreover, the consequences include reversing the present rush to house every person in a Sydney because the present economic modeling of projects excludes the impact costs of new population on established infrastructure that causes overloading that it is more costly to rectify.

    Classical economics would have the entire Australian population living on the head of the same pin stuck into Pinchgut Island, a practically absurb result of development by minimising the expense of excluding the costs of fresh population necessarily using existing nineteenth century infrastructure.

    • Ian Mott says:

      Thanks, Campaigner. Back in the late 1990s the Bureau of Transport Economics worked out the cost of congestion in each of the State Capitals but they did’t take it the step further and divide this total cost (that is borne by the existing resident) by the number of new residents. It varied quite a bit from city to city, with the cost per new settler in Sydney being lower than for Melbourne and Brisbane because Sydney has already suffered the congestion while the other cities were lagging, at the time.

      In Brisbane this cost of congestion, in terms of new bridges, tunnels and motorways etc and the cost in extended commuting time, came to $6,000 a year for each new arrival, be they migrant or home grown. At the time this $6,000 was equal to the average Queenslander’s share of all State Government expenditure. And as each new arrival in SEQld was also going to get their own share of State outlays, these people were actually costing double the average. These days the average state outlay per person is about $10,000 so we can safely assume that each new arrival in SEQ costs the existing residents $10,000 more.

      This adds a new dimension to the economics of devolution and decentralisation when every additional person that by-passes the major cities and settles in the regions will reduce metropolitan congestion costs by that same $10,000. So when a new State forms its head office infrastructure, the 2,000 direct jobs, and the 7,000 indirect jobs, and their 9,000 dependents will reduce metropolitan congestion costs by $180 million a year.

  4. Rob Cannon says:

    I am finding this very interesting. I am new to facebook and the New England movement but can see that a lot of rubbish and disinformation has been the major hold back of it ever happening. I found on your blog a plan that Cohen released in 1924 showing the outline projected for a state. Any one with any sense would have known that the NSW Gov. would find a way to stop it. By the way the N stands for Newcastle, S for Sydney and W for Wollongong where 78.5% of the states population resides. I would propose to toy that until boundaries are confirmed we will all be running around with our heads in the sand. Move the western boundary from Cohens map to Longitude 147 deg East and on the southern boundary Latitude 32 deg South carry that over to Gloucester then down the Myall River to the sea.

    This gives an approx area 05 193440 Km2 and approx population of 800,000.
    Compare with farming states in the Usa Montana 381,156 Km2 – 974,989; Wyoming – 253,348 Km2 – 544,270; Sth Dakota – 199,905 Km2 – 812,383. and you would say we would have a viable state.

    Good luck and keep fighting

  5. Ian Mott says:

    You make a good point about the farm states in the USA, Bob. The smallest Canadian Province is Prince Edward Island, with only 135,000 people. But in fact we have a much more extreme example of a viable small state here in Australia. Norfolk Island has its own government within the Federation, has just under 2000 people but it has more powers than an Australian State, with control over immigration and right of entry in respect of other Australians, and its own defence force. And if anyone were to question their “viability” they would respond with a rich vernacular.
    When the state of Qld was formed the population was less than 50,000 but the voters of Qld were not concerned about whether their new state compared with the other states. What they wanted was full controll over their own governance and they were prepared to accept a smaller scale, higher cost solution to get it. The same will apply to any other new state. The “efficiencies” that supposedly come from being in a large state do not compensate for the inefficiencies that stem from remote, distracted governance by absentee metrocentrics. Good local policies, developed by the regional community, to serve their own priorities, never seem to get counted in an assessment of a new state’s “viability” but they have a much greater bearing on the long-term interests of the regional population.

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