‘Savings’ from Australia’s public service efficiency dividend don’t add up – we should scrap it

As the election approaches, and with each events dedicated to massive tax cuts for high-income earners, the issue of financing even modest electoral commitments is changing into evident.

As a consequence, we are seeing a resort to time-honoured expedients for saving cash in ways in which seem painless. Labor has promised to cut back spending on consultants and conduct an “audit” of presidency waste. The authorities has responded in variety with a plan to extend the annual efficiency dividend imposed on the public service, from 1.5% to 2%.

The efficiency dividend was first imposed underneath the Hawke authorities in 1987.

Officially, the concept was motivated by the then-nascent data know-how revolution, which was anticipated to yield spectacular features in productiveness. Behind this rhetoric was a perception held by many within the authorities that there was loads of slack within the public service, and that managers may discover financial savings in the event that they needed to.

Three and a half a long time on, the cumulative impression of the efficiency dividends is an actual discount of between 40% and 50%. That should have produced a large saving.

But the truth is kind of completely different. As with most office-based companies, the precise prices of working the public service have risen over time, even after adjusting for inflation. The variety of public service workers has risen, as has the typical actual wage they earn. What has gone improper, and what are the teachings that should be discovered about efficiency dividends?

First, whereas we have seen superb progress in technological phrases (a smartwatch has extra computing energy than the quickest supercomputers of the Eighties), this hasn’t translated into huge productiveness features. This was already changing into evident to astute observers when the productiveness dividend was launched. In the identical yr, the Nobel prize-winning economist Robert Solow noticed: “You see the computer age everywhere but in the productivity statistics.”

In truth, throughout the financial system as a complete productiveness development has been sluggish. The microeconomic reform program of which the efficiency dividend was a component delivered some preliminary features however these rapidly petered out.

Still, labour productiveness development has averaged about 1.5% yearly, suggesting to some observers that an efficiency dividend at this fee is sustainable. The downside with this argument is that labour productiveness development is the supply of will increase in actual wages and dwelling requirements. While wage development has fallen considerably wanting productiveness development, the concept actual wages could possibly be held indefinitely at 1987 ranges is a nonsense.

The solely approach to safe persevering with efficiency dividends can be if productiveness within the public service grew extra quickly than for the financial system as a complete.

How then, has the efficiency dividend been sustained? The reply is that the efficiency dividend quantities to an automated minimize within the provision of public companies, with the selection of what to chop being left to particular person departments and companies. The financial savings are then used to announce new applications, a lot of which do little greater than fill the gaps created by earlier cuts.

It’s simple to see the political attraction of this course of to governments of both celebration. The cuts related to the efficiency dividend are too small to be observed in any given yr, and might’t simply be recognized. By distinction, the brand new applications they finance give ministers loads of alternatives to make themselves widespread.

As quite a few stories and impartial analyses have concluded, the cumulative impact of unplanned cuts is to hole out the core capacities of governments, whereas loosening self-discipline on new applications. Two penalties of this course of are notably noticeable.

First, whilst the essential capabilities of presidency have been eroded, we’ve seen a gentle improve in low-level pork-barrelling, exemplified by the sports activities rorts and station automotive parks scandal. Projects that should have been undertaken, if in any respect, by state and native governments have as a substitute been alternatives for federal ministers at hand out novelty checks.

Second, since coverage evaluation is a straightforward goal for cuts with little preliminary impression, we’ve seen rising resort to high-priced consultants to do work that should have been undertaken in-house. And this brings us again full circle, to Labor’s promise to chop spending on consultants. That’s a good suggestion however not a supply of free cash to be allotted to fund election guarantees.

The solely sustainable approach to cut back spending on consultants is to extend the coverage capability of the public service.

That in flip means scrapping efficiency dividends.

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