Battle over disability policy: questions of money and the rules

The serious defect with the biggest single spending initiative of the former Labor government — the National Disability Insurance Scheme — is not an emerging cost over-run but the $5 billion funding shortfall legacy and flawed provisions relating to risk and governance.

The NDIS needs to be significantly reformed to ensure its sustainability. Yet that seems a difficult, perhaps an insurmountable task, given the legal rigidity in Labor’s model and the fierce ALP resistance, federal and state, to efforts by the Coalition government to reform the model.

The NDIS is now plagued by a demise of trust between the federal and state governments that constitutes a risk to its successful implementation.

The first decision taken by new Social Services Minister, Christian Porter on his first day in the job was that a special NDIS account had to be created to preserve savings from current spending programs in order to guarantee NDIS financing long-term.

The history of the Julia Gillard government will be rewritten in coming years as the full impact is revealed of her huge extended spending programs on a deficit budget and fragile economy — the certainty, however, is that her legacy is pivotal to the 2016 election campaign and its impact will only intensify in future terms.

The biggest spending agenda is the NDIS — costing $22bn by 2019-20 split almost equally between Canberra and the states. It is a visionary and innovative scheme based on insurance principles that envisages about 460,000 people with significant and permanent disability would receive support and be better able to participate in community life.

The NDIS, unlike other Gillard programs, was bipartisan from the outset. This is the fundamental difference between the NDIS and other big spending Gillard programs, notably the hospitals agreement and Gonski school funding. While Tony Abbott and Malcolm Turnbull have insisted that health and school programs will not be funded as authorised by Gillard, the NDIS is proceeding.

Indeed, the Coalition will claim joint political ownership with Labor over the NDIS, a claim Labor fiercely resents.

“The Coalition is fully committed to properly, adequately and sustainably funding the NDIS,” Porter told Inquirer. “Unfortunately Labor left a $5bn gap in NDIS funding — that’s $5bn each year. We will have to find $5bn of additional funding to fully fund our absolute commitment to the full rollout of the NDIS and to protect it for future generations.

“Savings that Labor claims it made to help fund the NDIS went into consolidated revenue and were never set aside to fund the NDIS. They were washed away by Labor’s budget deficits.”

The funding shortfall is compounded by two other structural flaws in the NDIS. The first is that under the Heads of Agreement finalised under Labor the national government will meet 100 per cent of the financial risk from any cost overruns — that is, from either more participants or higher average package costs than forecast.

The Turnbull government is advised this constitutes some of the most generous financial arrangements the states have been given in the history of commonwealth/state relations. This model mocks the philosophical and legal basis of the NDIS: that it is supposed to be an equal partnership between the commonwealth and the states.

Having the national government carry 100 per cent of the risk creates bad incentives in terms of state behaviour and detracts from financial sustainability in the long-run. The Turnbull government has been advised this risk sharing structure creates “fundamental inefficiencies” in the scheme. To this point the states have shown only hostility towards any change in the risk structure.

The second defect is NDIS governance — outside of the NDIS Act, the scheme’s rules largely operate in such a way that the federal minister cannot give directions to the chief executive or the NDIS board without the agreement of all states.

In short, one state can veto even a modest effort by the Turnbull government to ensure the NDIS adjusts to circumstances or to better allow financial risk to be contained.

A more flexible NDIS is essential given the sheer extent of the system’s transition in coming years, moving from 30,000 participants to 460,000 in 2019-20.

The depth of Coalition/Labor and federal/state tensions over the NDIS, its funding and governance, raises the likelihood of bitter accusations in the election campaign of “undermining” the scheme.

Shadow Finance Minister, Tony Burke, told Inquirer that Labor in office had outlined a “credible plan” to finance the NDIS. “Any claim by the government the NDIS was not fully budgeted for by Labor is false and deliberately undermines the future of the scheme,” Burke said. “It would be the height of irresponsibility for there to be a claim that savings measures budgeted to pay for the NDIS should be ignored.”

The absence of trust among the NDIS partners was apparent a month ago at a meeting of federal and state disability ministers when Porter’s efforts to invest the national government with more authority to guide the scheme were rebuffed.

Contrary to scares run by some states, Porter does not seek any change to the NDIS Act or rules to alter the critical definition of eligibility or “reasonable and necessary” support for the disabled. He does, however, seek to be able to make board appointments after consultation in order to strengthen the board’s expertise.

Board chairman Bruce Bonyhady said recently the NDIS was “on time and on budget” with client satisfaction above 90 per cent. Its insurance model is far superior to the old welfare model. Bonyhady’s theme is that the NDIS is an exemplar of what the Turnbull governments wants — smart, innovative, agile policy. Given the trials, there is now 10 times as much data as when the Productivity Commission reviewed the concept and Bonyhady says the best cost estimate for the NDIS remains at around $22bn at full rollout by 2019-20.

Porter agrees the NDIS is on track. He sees no cost overrun. He rejects such critiques by a number of conservative analysts. The best estimates remain that in the early years the scheme may be underspent. For Porter, this is an opportunity to get the long-run governance right.

When Gillard established the NDIS in her government’s last budget, the Medicare levy was increased from 1.5 to 2 per cent of taxable income from 2014 with the proceeds going into a DisabilityCare Australia Fund. The higher Medicare levy meets less than half of total NDIS required federal funding at 2019-20.

Labor insists that it fully funded the NDIS for a decade in its last budget. In the end, however, such claims are not tenable.

Apart from the Medicare levy Labor identified other savings across the decade to finance the NDIS — tightening the private health insurance rebate (savings of $6.5bn); reforms to retirement incomes (savings of $6bn); and a category of “other” saves involving a range of tax changes for fringe benefits, medical expenses, tobacco excise and realignment of Medicare Benefits Schedule indexation (savings estimated at $20.6bn).

All these measures were legislated with one exception. How accurate these savings estimates might prove over the long run will never be tested since Labor lost the 2013 election. But there are three core points in relation to Labor’s NDIS funding claims.

First, Labor chose the high risk option, when the budget was in deficit, of using major savings to fund new spending programs, not for deficit reduction. By definition, given the scale of the NDIS project, this was a serious fiscal risk for the country. It meant, if the budget forecasts proved astray, that the nation’s deficit and fiscal problems over the long run would be accentuated. This is exactly what happened.

Second, while Labor created a fund for proceeds from the Medicare levy it created no fund for the other savings designed to fund the NDIS. They just went into consolidated revenue. The funds, in short, were not guaranteed for the NDIS. Labor designed the funding so that the Medicare levy impact would work in the early years but then its impact would fade.

Third, the idea of fully funding the NDIS for a particular budget bottom line evaporated when the budget position rapidly deteriorated. If the government had wanted to maintain the equivalent fiscal position then an entire new series of savings would have been required.

In short, the NDIS savings were lost in a further mounting deficit.

Financial advice to the Turnbull government is that its share of NDIS funding in 2019-20 will be $11.3bn. The breakdown shows this comes from three sources: existing federal funding of $1.1bn; the Medicare levy contribution of $3.3bn and redirection of state funding for existing disability services of $1.9bn.

This totals $6.3bn and leaves a shortfall of $5bn each year.

Porter has introduced legislation to create an NDIS Saving Fund Special Account. Given the size of the shortfall, he sees this as an essential step to guarantee full NDIS funding with a far more comprehensive and guaranteed mechanism than Labor proposed. The purpose is to ensure NDIS funding does get identified separate from the budget repair task.

The special account, sitting in parallel with the Gillard Medicare levy account, will receive savings from across the budget, not just the social services portfolio. Moneys accumulated in the fund will be quarantined for NDIS funding, separate from consolidated revenue.

Government policy is that the NDIS funding gap must be met by savings — not by borrowings, tax rises or another levy. This is consistent with Turnbull’s in-principle rejection of higher taxes. In short, savings will be credited to the account by government decisions over a 10 year period. There will be an early contribution in the May 2016 budget.

Such provisions constitute a further strain on the budget and on Australian taxpayers. Porter is not devising the new fund to wedge Labor. He is creating the fund to guarantee NDIS financing. Its creation, however, is a serious political and financial embarrassment to Labor, given its repeated insistence that it identified how to fully fund the NDIS.

Shadow Minister Jenny Macklin has attacked the Turnbull government saying that it keeps “trying to mislead and frighten Australians about the future of the NDIS.” On March 17 she called upon the government to “stop lying about the NDIS, stop using people with disability as a political football and stop trying to divide Australians.” Macklin called Porter “dishonest” for claiming there was a funding shortfall that required special measures to address.

In this climate the prospect for necessary federal-state co-operation on the NDIS is limited. The Victorian government has accused the Turnbull government of making people with disabilities wear the costs of the government’s revenue problems.

In relation to the 100 per cent risk burden being carried by the national government, the Heads of Agreement specify that when the NDIS achieves full rollout Canberra may seek a 75/25 per cent risk split. In order for this to happen, however, all states would have to agree to accept a 25 per cent risk. Current signs are that the states have no interest in this revision, another pointer to the governance and rules defects in the NDIS.

The national government has spent the past year canvassing governance reforms with the states. No change can be advanced without state approval. The Turnbull government cannot take unilateral action on any front. There is a sentiment in the NDIS board that the national government should accept the reality of the power and legal structure inherited from Labor and make the most of it.

This is not the view of the minister or government. But the current debate on governance is deadlocked. Porter, however, finally won agreement for an expansion of the board and changes to existing board terms and legislation has been introduced to this effect.

The story to this point: the NDIS is proceeding and is bipartisan. Yet its design and funding is flawed. The claims of the Liberals to reform the NDIS according to their judgments and priorities have provoked suspicion, fears and a bitter political rivalry that threatens the maximum utility of the scheme.