Appendix 1 - Part C - The classification of the functions of government - Australia
The classification of the functions of government - Australia (COFOG-A) framework is designed to classify the expenditure of commonwealth, state / territory and local governments by purpose for the general government sector.
The COFOG-A framework has been designed so that users can classify individual transactions according to the primary purpose of the outlay. Users need to consider the main objectives of government when they are deciding how to classify certain transactions. In the situation where a government unit has more than one function (which may make it difficult to allocate individual transactions), users need to determine which function is the dominant function of the unit.
The following two examples give an indication of how users need to consider the main objective of the government before they can decide on the purpose of each transaction.
- Case 1: Provision of housing to doctors in remote locations - It may not be clear whether outlays should be classified to health (COFOG-A 07) or housing development (COFOG-A 0611). The main objective of governments in providing housing to doctors in remote locations is to deliver health services to remote communities as opposed to making housing available for the doctors. Housing is offered to doctors as an incentive for them to work in remote locations so that the remote communities have access to adequate health services. Therefore, related outlays should be classified to the relevant class of health (COFOG-A 07).
- Case 2: Provision of housing to serving members of the defence force - This case encompasses two scenarios. Firstly there is the provision of defence housing on base to serving members of the defence force. The main objective of the Commonwealth government in providing this type of accommodation is for defence purposes. Therefore related outlays should be classified to military defence (COFOG-A 0211).
The second situation is the provision of defence housing within the community to members of the defence force. The main objective of the Commonwealth government in providing this type of accommodation is to support the families of defence personnel living within the local community. As such, these outlays should be classified to housing development (COFOG-A 0611).
Individual versus collective goods and services
Paragraph 6.133 of the IMF GFSM 2014 notes that government services can benefit the community either individually or collectively. The COFOG-A is used to distinguish between individual and collective goods and services provided by general government units. The COFOG-A functions are defined so that they represent individual or collective consumption, but not both.
Paragraph 6.134 of the IMF GFSM 2014 defines a collective service as a service provided simultaneously to all members of the community or to all members of a particular section of the community, such as all households living in a particular region. Other characteristics of these collective services may be summarised as follows:
- The use of such services is usually passive, and does not require the explicit agreement or active participation of all the individuals concerned.
- The provision of a collective service to one individual does not reduce the amount available to others in the same community or section of the community. There is no rivalry in consuming these services.
Paragraph 6.135 of the IMF GFSM 2014 defines an individual consumption good or service as one that is acquired by a household and used to satisfy the needs or wants of members of that household. Individual goods and services are essentially private as distinct from public goods and services. They have the following characteristics:
- It must be possible to observe and record the acquisition of the good or service by an individual household or member as well as the time at which it took place.
- The household must have agreed to accept the provision of the good or service and to take whatever action is necessary to make it possible, for example, by attending a school or clinic.
- The good or service must be such that its acquisition by one household or person, or possibly by a small, restricted group of persons, precludes its acquisition by other households or persons.
Paragraph 6.136 of the IMF GFSM 2014 further notes that an important characteristic of an individual good or service is that its acquisition by one household, person or group of persons brings no (or very little) benefit to the rest of the community. The borderline between individual goods and services and collective services is not always clear. While the provision of certain individual health or education services may bring some external benefits to the rest of the community, in general, the individuals concerned derive the main benefit. When a government unit incurs expenditure on the provision of individual goods or services, it must decide not only how much to spend in total but how to allocate, or distribute, the goods or services among individual members of the community. In contrast, in the case of collective services, all members of the community benefit from such services.
Paragraph 6.137 of the IMF GFSM 2014 also states that expenditure incurred by governments in connection with individual services such as health and education are to be treated as collective services when they are concerned with the formulation and administration of government policy; the setting and enforcement of public standards; the regulation, licensing or supervision of producers, etc. On the other hand, any overhead expenses connected with the administration or functioning of a group of hospitals, schools, colleges or similar institutions are to be included in individual expenditure. For example, if a group of private hospitals has a central unit that provides certain common services such as purchasing, laboratories, ambulances, or other facilities, the costs of these common services would be taken into account in the prices charged to patients. The same principle must be followed when the hospitals are non-market producers – all the costs that are associated with the provision of services to particular individuals, including those of any central units providing common services, should be included in the value of expenditure on individual services.