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Mythbusters - Does the Government waste money in June?
This isn’t surprising because we all know that a Christmas present delayed until the Boxing Day sales somehow isn’t the same. Of course, if you’re super-organised, buying in the Boxing Day sales for the next Christmas Day is a clever thing to do. It turns out that timing is pretty important in buying Christmas presents. But timing doesn’t give you much information about the quality of the present.
My thesis is that this is true of government spending too. Contrary to the analysis one sees repeated occasionally, I contend that spending in June cannot be assumed to be wasteful when considered in context.
What is that context? Firstly, the Government has an annual budget cycle, based on a July-June financial year. With some exceptions, funds allocated to a FY should be spent in that FY. While not a perfect proxy, contract value approximates expenditure, up to a point. (For example, such spending doesn’t include APS salaries.) So, you’d expect to see at least some contracts begin and end in the same FY. And, indeed we do see that, to a certain extent. On average, over a seven-year period, 22% of contracts by value and 75% by volume end in the FY they began. As more expensive contracts can safely be assumed to last longer, this isn’t all that surprising.
As an aside, my analysis is based on the historical contracts data set available on data.gov.au, which covers 1 July 2007 through 31 December 2014. I only considered contracts that started from 1 January 2008 through 31 December 2014. I did not use the records from 1 July – 31 Dec 2007 to avoid a bias so the data is in calendar years not FYs. Data from January – June 2015 wasn’t included as we haven’t finished cleansing it yet. So, the total contract value is $266 billion across 506,838 contracts. This data comes from AusTender on which all contracts at or above $10,000 are required to be recorded.
So, we can see that when all contracts are considered, not just those with a very short duration (<31 days), June is actually not a peak period in which contracts start.
What about when we consider all contracts, not just those that end in the FY in which they began? Here, the situation is even clearer. Most contracts start in July:
Since budget funding, while often announced in May, regularly starts in the following July, this is to be expected.
None of this is suggesting a June peak. How would one be achieved? Spending money quickly necessitates a quick procurement method. Generally, this requires a limited tender (or direct sourcing). Limited tenders are allowed for contract values below $80,000 and, in some circumstances, for larger contracts. About 40% of contracts above $80,000 by volume and about 58% below $80,000 by volume (56% by value) are conducted by limited tender.
Purchasing off an established panel can also be quick but, historically, less than 6% of contracts by value go through panels so I’m going to ignore that. Open tenders need to be in the market for at least 25 days normally so June expenditure would need to be planned some time in advance.
Consequently, if there were a June splurge, we’d expect to see a peak in limited tenders less than $80,000 in June, but we don’t:
Even if we ignore the $80,000 limit, we don’t see such a splurge:
Having looked at the context, let’s zoom into the data most recently discussed publicly – the value of contracts reported with a June start date with less than 31 days duration. Rather than just considering one year, I have used the average over seven years again. I have compared it with the total value of contracts reported in June and considered it as a percentage of both the monthly contract value and the annual contract value.
|% < 31 Days||0.27%||0.53%||0.43%||0.55%||0.85%||1.84%|
|%< 31 of Annual $||0.02%||0.03%||0.03%||0.03%||0.05%||0.18%|
|% < 31 Days||0.15%||0.23%||0.44%||0.55%||0.47%||0.38%|
|%< 31 of Annual $||0.04%||0.03%||0.03%||0.03%||0.03%||0.03%|
I agree that there is a peak of short term spending in June. But it’s a pretty small peak. The June figure (that is the value of June contracts of duration less than 31 days) amounts to 4.5 times an average day’s value over the 2556 days in the period reviewed. That means this particular value in the month of June is 15% of an average 30-day period. The amount in question is 0.18% of the average annual value.
Of course, of that particular spending type (contracts of less than 31 days duration), relatively small that it is, the value of June contracts is about four times the average month. Like the Christmas presents purchased in the week before Christmas though, this says nothing about the quality of the spend.
Delegates are still required to vouch that any expenditure is value for money. Given the annual budget cycle, monitoring spending closely, maintaining a reserve while it is needed, and managing risk are all valid and prudent budgeting measures. It’s hardly surprising then that their spending plans encompass such an outcome, particularly one that covers only 0.18% of the average annual value.
So what do you think – is this myth busted? Your comments are welcome.
Last updated: 04 September 2015