This Eureka Street Plus article, typically exclusive to subscribers, has been developed in partnership with Catholic Social Services Australia. We're pleased to share it with all Eureka Street readers.
Not long ago, one of Australia’s largest nonprofit service providers faced a choice: either to cut a vital disability support program in a regional town, or absorb another year of rising costs (compliance, insurance and IT) without any increase in government funding. The board chose to keep the program running. They absorbed rising costs, and the organisation posted a financial loss. According to Professor David Gilchrist, it’s a typical story in the world of not-for-profit organisations. Gilchrist, an accountant and economic historian by training but not by temperament, has spent three decades working in and around the human services sector as an executive, policy adviser and researcher.
Now based at the University of Western Australia, he has just released what may be the most comprehensive and sobering account yet of the economic pressures facing Australia’s nonprofit social service providers. The report, Real Costs, Real Impacts, draws on 21 years of data observations from seven large nonprofit providers — together employing more than 3000 staff and serving tens of thousands of Australians. The report traces the widening gap between what it actually costs to deliver essential services on behalf of governments and what governments are willing to pay for them.
These stark findings reveal a national funding model that is structurally incapable of sustaining the services the most vulnerable Australians rely on. The result, Gilchrist argues, is the quiet and slow-motion collapse of services across Australia. In this conversation, David Gilchrist explains why a failure to adequately fund social services isn’t just inefficient, it’s also unjust.
David Halliday: To start off, can you set the scene for us? What's the situation facing social services in this country?
Professor David Gilchrist: I've been studying the financial and workforce sustainability of social services organisations for 20 years. The last five years have seen a massive decrease in financial sustainability of these nonprofits primarily due to poor funding policies.
Real funding has been falling and demand has been increasing. The complexity of demand is also becoming greater, which means service delivery costs are rising due to needing more experienced and better trained people.
Current government funding and indexation policy is crippling the sector's capacity today, but even more importantly, crippling it for the future: the sector cannot build its balance sheet to be able to pay costs like employee entitlements or to invest in quality outcomes and staff training. There's a significant medium and long-term problem coming down the pipeline reducing the capacity of nonprofits to continue delivering those services.
Why has demand increased?
The cost-of-living crisis has meant more families and individuals have fallen into poverty, so they need more services. The not-for-profit charitable sector is increasingly supporting people with higher needs because the primary healthcare sector can't cope.
The social services sector is a critical support for the community, and that capacity is being undermined as their financial capacity is being whittled away.
There's also significant competition with other sectors. In mining states like WA or Queensland, it’s difficult to recruit people because you can’t compete with salaries in the mining industry, and also because, increasingly, people can only get part-time or casual employment with charities and not-for-profits. Funding policies governments use mean there is no guarantee of funding going forward, even though in some cases governments have been funding some of these organisations for decades. So workers don’t know whether their job will be renewed. At some point the sizable difference in remuneration combined with greater stability means that carers need to assess their options outside of the community services sector because they have family commitments; even when they love the work they do and the people they care for.
So look closely, and you see a dire situation.
And it’s rapidly becoming worse, because real funding is not based on the comprehensive cost of service delivery. It is based on governments’ historical sense of what costs should be. It’s also important to remember that we have no transparency over the ‘service gap’.
What’s the service gap?
When we talk about need in the community, what we’re often talking about is ‘economic demand’: that quantity of demand that's created by governments stipulating that they will buy a certain number of services in a particular area. Those services don't actually represent demand in the community — they represent the number of services the government wishes to spend its money on.
There is no transparency over what the need is, or over the gap between that need and what governments are willing to fund in terms of service delivery. Governments are entitled to make spending decisions as they see fit, but, equally, they must also be accountable for those decisions and the poor data availability means they are not.
For instance, one obvious area of need is homelessness, but we only know it's there because it's so confronting when we wander around any Australian city. Other service gaps are hidden, although there’s no doubt the service gaps are getting bigger.
What’s the reason for the disconnect? Is it because government doesn’t have access to accurate data? Or do they not want to know what the actual costs are?
There are a couple of aspects to it. For instance, funding indexation — the annual increase in funding designed to assist nonprofits to meet increasing costs — is miscalculated because governments use inappropriate components to calculate it. Our report has one case study where an organisation had cost increases of 13 per cent and 11 per cent in the 2023 and 2024 financial years against indexation of 1.3 per cent and 5.1 per cent in those years respectively. There is no connection between how indexation is calculated and the cost components that go into delivering services — governments don't want there to be a connection because the cost will be far greater. The Australian Bureau of Statistics should be collecting that data and creating a ‘producer price index’, which is what they do for the mining industry, for transport, for construction and which will allow the community to understand the real cost increases impacting these nonprofits.
Social services is one of the biggest employers in Australia and one of the biggest consumers of taxpayer funds, yet we don't collect that data. The last time significant data was collected by the ABS on the sector was in 2013. It's not that there's no capacity or ability, but rather it’s not a priority in governments.
I was approached about three years ago by Minister Lee and the DSS to help construct a national 10-year development plan for the not-for-profit charitable sector, which was published in November last year. It outlines several initiatives, one of which is having the ABS construct a price index. So far, the government hasn't moved on that.
How much is the industry currently underfunded?
It's difficult to get across that number, but three things need to happen. The first is the sector and the government need to get together to understand what the components are for each service and to apply comprehensive costs to them. That's pretty straightforward.
Indeed, the ACT government is looking at this now: what does a service look like? What are its costs? How much money is being prioritised? Those things are easily calculated. I'm not saying they're not expensive to calculate, but it's not a lot of money to invest to make sure we're getting it right. It's politically difficult to do because there's no doubt the gap won't be closed — prioritisation of spending is away from human services to other areas.
I think need can also be estimated, but we don't do that: we simply buy a number of widgets rather than estimating how much we're going to need.
The third element is that lack of transparency means taxpayers are not really aware of what the spending priorities are in the context of outcomes. Australia’s submarine program is a great example: the government estimates it will cost up to $368 billion over the next three decades — while the social services sector may only need a couple of billion dollars annually.
I'm not saying that is not a lot of money, but we can't afford not to do something about it. There's also a need to do something about it in terms of driving the economy because, employment in mining, retail and manufacturing has retracted — it's only the social services sector that has kept employment up.
How new is this problem?
I've been in the sector for 30 years as well as in academia and in government, and it's always been a problem; but until recently, the funding policy and the relatively shallow incline of cost increases meant you could role your cashflow forward. You might argue that some these organisations are even technically insolvent, but they were able to work forward because funding was provided in advance, in bulk, rather than by iteration of services delivered. You've now got this conflation of challenges of funding policy changes and costs increasing at a much greater rate.
Why have costs risen so dramatically?
Changes in business structure have brought added cost pressures.
Take subscriptions. Like all organisations today, a charity needs cyber security software to operate. Five or ten years ago, it might have gone to a lottery commission or a philanthropist for a donation of $5000 to purchase software off the shelf, and that would be it for another five or ten years. Now, it requires an ongoing subscription, which is not absorbed in the historical price that government pays. Security strategies are very expensive. Building maintenance is through the roof. Organisations are increasingly faced with redundancy commitments when they have to let go of staff because of funding shortfalls or government policy changes Auditing costs have also gone up and are likely to continue to.
There's also been an important change over the last five or so years in the way government does business, where increasingly they operate in a ‘quasi market’ system. They go to a charity and say, ‘We want you to sell us these things, but we will only pay you when you give us an invoice and we will set the price based on what we want to pay’.
Under the old arrangement of bulk-funding in advance, you had the ability to cashflow your processes while you delivered services.
Under the new arrangement of being paid in arrears, charities not only need to have the cashflow to get to that point, but they can't get staff because they can't ‘sell widgets’, so to speak. And if you can't sell widgets, you can't invoice the government. Suddenly you're not covering your administrative overheads because government will only pay so much for your administrative overheads providing, of course, you're selling this bucket of widgets. So, it's a conflation of things that make the whole system financially unstable.
If the bottom falls out of the industry, nobody wins. So, is it just a matter of government seeing to what extent they can push the envelope?
Well, there's certainly that. We've seen that in progressive jurisdictions around Australia, most notably in Western Australia in 2011, when the Barnet government wrote a check for $600 million in additional funding for community services having recognised the cost of services was not being met by government funding policies.
Governments see cheap and efficient as synonyms. They’re not. What happens when you go cheap in this sector is that hospital beds get filled with people who should instead be supported by charities, which is much cheaper than a hospital bed. Government pays either way, but under the current system taxpayers are paying more, although this is not transparent. I defy you to get out of a government how much they're spending on hospital beds for people that shouldn't be there. You can’t get that information.
Why not?
It’s a couple of administrative conveniences that are really impactful. For instance, if the NDIS can shift things out of its cost base, the state budget picks it up, and the Commonwealth budget doesn't care. We have this arrangement where the taxpayer simply pays while governments believe they are saving taxpayers’ money.
Different departments within a government are happy to ‘cost ship’ as well. So, if I'm the department of communities running an out of home care program and I can push people into the hospital, that's a win for me. Taxpayers still come out worse, but who cares about the taxpayer?
The administrative processes help to hide this, because you can shunt the costs around.
The NDIS is a bit of a yardstick because it has been operating year-on-year at an underutilisation of 20 to 30 per cent. With the budget at $44 billion in the 2024 financial year, that means participants had around 10 billion in their pockets but couldn't buy services because the sector couldn't deliver the services.
It's often Indigenous communities that bear the brunt of the underutilisation. While national underutilisation is probably sitting around 25 per cent on average, for some communities it's 100 percent. I was chair of a charity that operated from Broome, delivering disability services in a radius of about 1000 km. It meant you had to have four-wheel drives and you had to pay $3 or $4 a litre for fuel. It also meant you couldn't get staff and you couldn't deliver those services, so you couldn't charge for them.
Has the lack of transparency and financial accountability been exacerbated because there hasn't been the political will to address these issues? Or is it that there hasn't been wider societal awareness?
I think it's the latter. The sector's not very good at communicating with the community. It talks to itself and complains to itself; it talks to government and complains to government. But unless you create a political problem, government's not going to respond because that's the nature of politics. An elected official is motivated by what's going to get them reelected. If the sector doesn't make a political issue out of this, then why would the prime minister bother?
I can't imagine any of this would have been welcome news in an election year, especially in a sector that is one of Australia’s biggest employers.
The sector actually has a lot of power because it is one of the most extensive operations in the country. This is a sector everyone has some connection with: they or a loved one may rely on its services, or they may engage with the sector in a professional capacity. One of the biggest problems is it permeates everything and yet everyone takes it for granted as a ‘nice to have’ rather than a ‘must have’.
I’m assuming there’s a widespread awareness of these funding problems across the sector?
I think it suffers from a confidence problem. As I said, I've been around it for 30 years, but I've also run a banking business and worked in government and as an academic. When you are on a not-for-profit board, people come from George Street thinking that because they run a bank they can tell you how your disability services agency should work.
Think about a company like BHP; they would have on their board all sorts of people with amazing skills and knowledge relevant to the mining sector. But these lawyers and accountants from George Street don’t know how the not-for-profit sector works.
On the other hand, the CEO of a not-for-profit organisation, while he or she may have a comprehensive understanding of how the service sector works, has often come up through the ranks of a care discipline and may not have the business and strategic acumen that members of a commercial board might have. And so there's not that knowledge base in the sector to be able to stand up confidently and say how things should be.
Could there also be a misalignment in terms of leadership in some NFPs? You said CEOs often come from service delivery backgrounds. Is it that the sector is not attracting the sort of people who might otherwise be running Goldman Sachs?
Absolutely. The short answer is it is because NFPs can’t afford the salaries. If you are CEO of a large not-for-profit, let's say with $50 million turnover, if you are getting paid $350,000 you're doing well. But if you are CEO of a $50 million business, you'll be getting paid a hell of a lot more than that. There are some magnificent people running NFPs but there are also some who are less competent, the same as in every industry. But the reality is it is difficult to attract people to the sector, and that's becoming increasingly a problem. I was talking to a man who had worked as a cleaner in a not-for-profit aged care facility; he was paid around $68,000 a year to work five days a week, 48 weeks a year. He quit to become a fly-in-fly-out worker in the mining industry and was paid over $100,000 working the equivalent of just 26 weeks a year.
The NFP sector has always relied on the fact that people like doing the work. Many are brokenhearted when they make that decision to leave, but the pay disparity is significant and they’ve got kids, a mortgage, other obligations.
So there’s probably an assumption that the government can get away with chronically underfunding the NFP sector given many people would work gratis, because they don't want people to suffer.
That’s right. The government relies on the public’s love for the charitable sector. But the sector's not good at communicating its problems to the world, and so people don't understand. My wife is a great example.
What do you think about the government’s decision to try to double philanthropy by 2030?
There's a lot of sympathy out in the community for the idea of ‘people giving back’. But it will cost the federal budget something like $9 billion in tax deductions. The person donating money also gets to say what problems their money will be spent on.
I've asked the government several times how they are going to plug that $9 billion budget hole. Does it come off the submarines? More likely it comes out of the portfolio that is being funded. But people can't imagine that donations aren't an unalloyed good thing. The lack of equity in the philanthropic process is also a concern — services that are essential but not “attractive” to givers will likely suffer under a regime of increased philanthropy.
That raises an ethical question of whether charities should have to make their services seem more attractive, especially if their organisation does essential work that might not have the popular appeal that is more likely to attract philanthropists’ support.
One of the case studies in our report has an organisation’s marketing bill going up 32 per cent. If a NFP relies on philanthropy, does that mean they’ve got to convince people to give their money to them and not to, say, the aged care place down the road? Or to the puppies in the next suburb?
Advertising for bequests costs time and money that would be better spent on the services the organisation aims to deliver. So, this whole quasi-market process is flawed — market economics is not the saviour. Governments and the sector need to get together to design the services and then fund them appropriately and transparently.
Are there any countries that have learned this lesson? Places that are now doing okay?
Certainly, the Nordic countries and Holland. New Zealand has experimented a lot. Canada has a lot of good projects. It's quite a leading light in that regard. The short answer is there are countries that do this quite well. Another problem we have in Australia is we're so conservative; we don't want to be seen to be wrong. For example, with the NDIS it took 13 years before we actually revisited it to say it's broken.
If some places are doing this well, could we not model our approach to say, homelessness, on the approach of countries that are already achieving the sorts of results we want to see?
Different governments around Australia have tried to attach their funding to some sort of results-based model. And in theory, it's a logical way to go. But two things become apparent: first, the financial unsustainability of these organisations means they can't afford to implement such a model. And second, you can't measure the results of a lot of human services because they’re lifetime outcomes. For instance, migrant services: if people come into the country as illegal immigrants, they go through a program, which usually takes about five years. And then you might say, we don't know if the program works for another five years. So, then it's actually 10 years before you can say if it has worked or not.
The other problem is if you don't measure the right thing, then you don't get the right service. For instance, I've seen cases where a disability organisation gets measured by how many outings clients get. And that sounds good, until you watch it in operation — there is increased pressure to see the clients going out, even if they do not want to.
Academic evidence suggests that efficiency is achieved in human services by having the decision-making at ground level within a national governance framework. The NDIS needs to be national because only the national government has got the money to pay for it. But the decisions have to be made locally. One of the reasons under-utilisation is so significant in remote communities is because NDIS services are aimed at the individual while these communities are used to having community-level solutions; but the NDIS can't change its modus operandi to fit the community.
So it needs to work with a completely different cultural paradigm. The community over the individual.
And it's the same in cities. If you have a child with autism or a profound disability, the parents often need as much support as the child, but can't attract any support. The decision-making needs to be within a household, because people with disability are all different and the solutions are different. They fall under umbrellas of prognosis, but efficient application of funding can only be decided by that individual.
This situation is obviously not sustainable in the long term. Are we going to see changes?
I think it's got to get worse before it gets better because governments don’t have the apparatus to be able to understand and change. What I think is likely to happen is that the gap is going to become so large that the community is going to notice. The system is becoming so Americanised, with more and more people either in the good bin or in the bad bin in socioeconomic terms, and with fewer people bridging the middle.
What's the way to solve that?
One of the things we're trying to do in Centre for Public Value UWA is raise financial literacy. Governments and NFP organisations are often effectively financially illiterate. They don’t know what it costs to deliver services or how to calculate that cost.
That financial literacy problem extends into line agencies, the agencies that are actually procuring from these charities.
This is an octopus of a problem.
That's why I was keen to be involved in this blueprint that was published last year. If only government would implement it — we're talking $50 million at the outside: upskill with $50 million to deal with a $200 billion segment in the economy — then we would be able to start to rectify some of this stuff.
The first step has got to be data. Being able to understand what's going on and then to be able to say, we're going to take this suburb and we're going to focus on improving it and then we'll change the suburbs around it. It might take 10 years, but at least you are moving forward in a positive way.
NFP employees are also one of the lowest paid cohorts in the economy. All these people, when they get their pay, use it to pay for their life expenses. They're buying groceries, they're going to the movies. It all goes back into the community. If jobs in the sector are impacted, these people will shift to unemployment — they're not going to be absorbed elsewhere.
It's also a cultural thing: if you’re running a cricket club, for example, you don't want to be paid too much because that wouldn’t be right. But if you’re running Qantas, it's quite alright to get paid millions plus a bonus.
What does that say about the mindset of the people running this industry? Maybe they are used to being in the trenches, stretching resources.
I think the mindset is that we don't deserve it. The not-for-profit sector is not seen as important.
Tools down, everyone.
One of the biggest problems that's occurred over the last 20 years in the sector is the adoption of market economics terms and ideas.
You get your directors from George Street running their charity as a competitive entity, in the way they run their business. But it's not the same. Nonprofits and governments have got to work together to be able to deliver services.
But then someone from commerce comes onto the board, they say you can't share with anyone. We'll start our own transport service because we're competing with those other guys and we've got to get market share. And the whole thing falls apart.
Best practice economic thinking.
It's governments paying for necessary services that the market won't pick up, but pretending it's a market. That's why we call it pricing markets. You talk about clients, you talk about pricing, you invoice for services that you deliver. All that language.
Has that thinking been a factor in getting us to where we are now?
Market economics is everyone's go-to in the Western world — the be-all-and-end-all solution. We are applying it in areas where it simply doesn't work, when instead government should be working with the sector, each intimately knowing what the other is doing and how it does it. And we need to have data around what the need is in the community and whether we're closing the need gap or not.
Do you come across that much? People wanting to see if they can take a NFP organisation and make it profitable?
Commercial organisations appear significant in the delivery of human services until you find out that those ‘organisations’ are largely one-person sole traders; often auxiliary health professionals. Occupational therapists or physios.
So what’s the solution? Is it building a new economic model for how we do nonprofits in this country?
In reality, we're trying to talk ourselves into having a market when in fact, it doesn't exist. I think it's about accepting that reality.
What's the prognosis? Will government figure this out any time soon?
It is not good. Governments in Australia have applied what they call an ‘efficiency dividend’ to their appropriation on an annual basis for about 30 years. Each year they look at the previous year; they adjust it for inflation for the programs they want to pursue. Then they often take three per cent off the top: the efficiency dividend. And you're only allowed to cut your expenditure on non-client activities. That means administration must be reduced.
Three per cent of the overall budget doesn’t sound like much, until it is applied only to administration. These departments are what we call ‘donut agencies’ — they don't have analytic capacity. So they have to go to consultants and ask, ‘can you work out this thing for us?’
For a relatively abstract problem, how do you frame it in a way that will engage people?
Start at the coalface and work backwards. What is it that Sam needs to live his life and to have the support he needs? And then take it back to Sam’s community, and so on, building it up rather than sitting in Canberra and pushing things down because you're so disconnected.
I'm not saying it’s easy by any stretch, but we are going to be spending that money anyway because we have to plug the gap somehow. And the ‘plugging’ approach is much more expensive than preventative action.
That's when you find all the hospital beds are full.
Exactly.
A difficult problem, but sounds like one that must be addressed. David, thanks for your time.
Thank you.
David Halliday is editor of Eureka Street.
Professor David Gilchrist is an accounting academic and economic historian at the University of Western Australia. He has worked in commerce, government and the not-for-profit sector in various senior roles. David has served on a number of community and national policy boards and committees, including as chair of Nulsen Disability Services and as a member of the Australian Charities and Not-for-profits Commission Advisory Board.