Canberra should do less, but do what it does well

In his first budget, Joe Hockey cut more than 200 spending initiatives and abolished or merged more than 70 government bodies. These cuts are a positive first step towards reducing waste, but the government needs better systems to continually improve public-­sector efficiency.

For more than two decades, the government has looked to the ­efficiency dividend — an annual funding reduction applied to ­government agencies — to reduce costs in the public sector.

In government agency budgets, there are two main forms of costs — departmental costs and administered costs. Departmental costs are running costs, such as wages and office expenses.

Administered costs are for ­programs, such as payments to families or subsidies to industry. Agencies receive funding for both, but only departmental costs are subject to the efficiency dividend.

Throughout the 2000s, departmental costs rose 23 per cent in real terms. This despite an effic­iency dividend of at least 1 per cent applying throughout the period.

There are other concerning trends in the public service. Since the early 1990s, the federal public service has grown top-heavy — the number of lower-level public servants has declined while the number of managers has risen.

Since the early 1990s, top-level management (Senior Executive Service or SES) has grown more than 50 per cent, from 1800 to 2700. Middle management has more than doubled, from 18,400 to 41,700. In 1991, managerial employees comprised 15 per cent of the public service. Today they comprise 30 per cent.

Salaries are also on the rise, particularly at the top. Base salaries for SES employees ranged ­between $103,000 and $160,000 in 2002; by 2012, they ranged from between $172,000 and $283,000. Adjusted for inflation, SES salaries have grown between 25 per cent and 35 per cent. By contrast, base salaries for regular public servants grew 15 per cent and in the private sector average earnings rose 17 per cent. There are far more managers at the top drawing large salaries, and fewer at the bottom delivering services. Those of the public service who are delivering services are doing so at higher pay grades. These trends all lead to a more expensive public service.

The efficiency dividend has failed to curb the rising cost of the public service, but there are also other issues. The dividend applies across the board, fails to distinguish between efficient and inefficient departments, puts greater pressure on smaller departments than larger ones, and encourages agencies to game the system by creating new policies to attract extra funding.

But the biggest issue is the dividend does not tackle public sector costs at their source. Government is spending more because it is doing more. New policies require new resources — and a larger ­bureaucracy to administer them. If we want to reduce the cost of the public sector, we need to limit what government does.

The Treasurer’s planned cuts to the public sector are appropriate, but small against a total of 937 federal bodies. Furthermore, programs and agencies need to be reviewed more often than the one-off commission of audit. ­Systems need to be in place to drive efficiency continually.

Here the government can implement two important reforms. First, government should conduct annual reviews of its agencies through an independent body. Government agencies are themselves responsible for formulating new policy. Some of these policies get implemented, others do not.

But many that do get implemented are ineffective, inefficient or are not a legitimate role for government. Without regular evaluation and decommissioning, too many programs stay on the books ­consuming resources and adding ­unnecessary regulation. Government should do less, but it should also do what it does well.

Second, the government should increase competition in the public sector. This will reduce costs, but it can also stimulate ­innovation and lead to better- quality services. There are several ways to increase competition in public services. Where approp­riate, the government can use vouchers to provide public money for taxpayers to buy services in the private market.

A recent example is the nat­ional disability insurance scheme, where eligible recipients receive taxpayer funding to purchase services from approved providers. But other systems can be implemented for other public services, such as education.

The government could tender public services to the private ­sector so that business can compete to provide better quality and lower-cost public services. An ­example is public transport, where private firms compete to provide transport services owned by the government. But there are other, successful, examples such as privately run prisons or the ­provision of job services by profit and non-profit organisations.

Last, public services should be contestable. Government should benchmark performance and cost within public agencies or against private firms. This information can also be used as part of the ­regular review of government functions. If there is persistent poor performance or high costs, the government can look to the private sector for alternatives.

The Abbott government vision of a leaner state requires a re-evaluation of the role of government and, while paring back public agencies is a positive start, much more can be done to reduce the government’s footprint.

Alexander Philipatos, a policy analyst at The Centre for Independent Studies, is the author of Withholding Dividends: Better Ways to Make the Public Sector Efficient, available at cis.org.au