non-market services

Budget 2021 — the second of the pandemic era — saw the government promise billions of dollars in new spending commitments including $17.7b over the next five years for Australia’s aged care system, an additional $13.2b over four years for the National Disability Insurance Scheme, $2.3b for mental health and suicide prevention services, $2b over four years for early childhood education, $1.7b to support an increased Child Care Subsidy, and $0.9b for the Pharmaceutical Benefits Scheme.

Much of this new funding was directed towards what might loosely be called the “care economy”, although that term is often applied not just to the formal (and typically public sector-dominated) provision of care in terms of health, education, child care and aged care, but also to the provision of many of those same services on an unpaid basis by family and community members. An alternative classification, focused more on the former, is “non-market services”.

Non-market services comprise those services that lack meaningful market prices, reflecting the public sector’s large role in their provision, mostly either free of charge or at a heavily subsidised rate. Collectively, they account for about 19 per cent of gross value added (GVA) or about 21 per cent of production (GVA excluding ownership of dwellings), split across three industries: education/training (6.4 per cent of production), public administration/safety (5.6 per cent) and healthcare/social assistance (8.7 per cent).

While their overall share of production has only increased by about two percentage points since the mid-1970s, that disguises a larger relative shift. The shares of education and training and public administration and safety have both fallen, but that has been more than offset by an almost four percentage point increase in the share of healthcare and social assistance.

“Potential solutions to these challenges bring with them the scope, not just for improved economic performance... but also a higher national quality of life.”

Big employers

Non-market services tend to be labour-intensive in nature and hence their share of employment is larger than their output share. They account for almost 29 per cent of total employment — 13.9 per cent of employment for healthcare, 8.4 per cent for education/training, and 6.5 per cent for public administration/safety. That’s up from a 21 per cent share in the mid-1980s. And as Budget 2021 has just reminded us, they also account for a substantial chunk of government expenditure. Spending on education in 2021–22 is budgeted to exceed seven per cent of total expenses, spending on health 16.7 per cent, and spending on aged care, the NDIS and childcare 10.5 per cent.

So, although much of this year’s dose of Commonwealth funding reflected direct recommendations — the money for aged care, for example, was part of Canberra’s response to the Royal Commission into Aged Care Quality and Safety; while the cash for mental health and suicide prevention was described in the Budget papers as “a first step to responding to recommendations from the Productivity Commission (PC) and the National Suicide Prevention Adviser” — it also makes sense to view the billions of new budget dollars allocated to non-market services as reflecting the latter’s importance more generally.

As a substantial share of output, employment and government expenditure, non-market services are a key determinant of overall economic performance, a point made by Treasury Secretary Dr Steven Kennedy PSM MAICD in a post-Budget speech to the Australian Business Economists on 18 May.

Similarly, PC chair Michael Brennan noted in April this year that “to be a high-productivity, high-income country, it is necessary to have a high-productivity services sector”. And as Productivity Commissioner Dr Stephen King emphasised in a speech in 2019, if we are to boost Australia’s productivity performance, a sector that accounts for almost 20 per cent of output and nearly 30 per cent of employment should have an important role. Non-market services also “play a vital role in improving wellbeing and reducing inequality”. The PC, for example, estimates their provision has a larger impact on reducing inequality than does Australia’s progressive income tax system.

“As a substantial share of output, employment and government expenditure, non-market services are a key determinant of overall economic performance.”

Potential payoffs

Reform of non-market services, therefore, offers the potential for attractive and mutually reinforcing quality of life and fiscal payoffs, since, as Kennedy noted, “lifting the productivity of these sectors can lead to a higher quality and quantity of services, as well as reduce demands on the budget”.

How big might the gains be? In the 2017 Shifting the Dial report, the PC estimated that the payoff from some “modest reforms in health” would be about $140b (in 2016 prices) over 20 years. Much of those gains would come in the form of personal gains to healthcare users, but the Commission also estimated direct economic gains of more than $4b a year for GDP plus potential reductions in long-term government health expenditure of more than six per cent. More recently, the PC estimated the cost to Australia of mental ill-health and suicide was $200b–$220b a year, including direct annual economic costs of around $40b–$70b, and that the PC’s recommended reforms would lead to a gain of around $21b per year to Australians, including approximately $18b in terms of improved health and quality of life, at an annual cost of about $4.2b.

While the potential pay-offs are large, so are the challenges. Traditionally, non-market services have experienced low productivity growth, low rates of innovation and low investment. As the PC has noted in its work on services, that partly reflects the nature of labour-intensive services that require face-to-face delivery, which limits the scope for introducing productivity-enhancing economies of scale or automation.

At the same time, limited competition and measurement issues complicate efforts to boost performance — improved quality of service can be difficult to measure using traditional metrics focused on easily quantifiable inputs and outputs. But the PC’s recent research agenda also offers potential solutions to these challenges that bring with them the scope, not just for improved economic performance and an enhanced budget bottom line, but also a higher national quality of life.