Govt. Figures Challenged by Public Finance Expert

The ACT Government’s savings estimates from school closures have been challenged by a leading expert in public finance. Ian McAuley, Adjunct Lecturer in Public Sector Finance at the University of Canberra, says that the figures presented by the Government are unduly narrow and ignore costs that will be borne by the community.

Indeed, the Minister for Education has been quite explicit about ignoring community costs. He told the Gungahlin regional consultation meeting on 19 June that what happened to the Hall shops if Hall PS closed isn’t of concern to the Government. The Minister is ignoring the requirements of the Education Act that the Minister have regard to the social impact on families and the general school community of closing a school.

Ian McAuley’s comments follow:

There are three things missing from the school closure debate.

First, the figures provided by the government seem to take a narrow fiscal focus. They do not take into account the travel costs imposed on parents and children, or the damage done to communities. In other words these are considered to be what economists call “externalities”, not taken into account because they are “external” to the decision-maker.

That’s hardly advanced economics, but it’s an example of the influence of managerialism in government. Responsible government considers all costs borne by the community; it would not even consider these to be “externalities”. But governments now consider themselves to be businesses, and their performance and decision-making is based on a narrow set of metrics, usually financial metrics, such as $ per student. We’re witnessing a thinned-down philosophy of government, not just poor accounting.

Second, this is, in part at least, a failure of planning. The original NCDC vision of Canberra was of a set of mixed communities. Just as there were not to be rich or poor suburbs, by extension there should not have developed young and old suburbs. Because their capital resources are constrained young people buy on the periphery, crowded out of the closer suburbs by those who don’t have dependent children. Part of the fault lies with the Commonwealth and its tax distortions, but there is also a local failure in physical planning.

Third, there’s an accountant’s obsession with scale economies. Scale economies are easy to measure, and they produce those neat little hyperbolic scatter diagrams we have been seeing in the Canberra Times. But there are also offsetting scale diseconomies, which means the real cost curve is “U” shaped rather than hyperbolic, with some optimum point, and a reasonably large zone around that optimum where unit costs vary little with size.

The trouble with scale diseconomies is that while they are real, they are hard to measure. Think of the benefit if a school is small enough if every teacher knows every student. Think of the cost if there are four bullies who can form a gang rather than two who can be kept in easy control – I’d suggest at least a square law when it comes to playground discipline. Think of the costs of coordinating 2n teachers rather n teachers. Accountants ignore these because they cannot measure them. Those curves presented by the ACT Government should curve upwards past some point.

Ian McAuley
Adjunct Lecturer in Public Sector Finance
University of Canberra
23 June 2006

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