Everyone (except the government) knows about the public service's end-of-budget-year splurge

What will it take to convince a government to even scratch the surface of this problem?

Two years ago, Informant columnist Stephen Bartos cited the concerns of several senior public servants, who said excessive spending in the lead-up to June 30, 2013 was among the worst they had seen. Almost everyone in Canberra, whether in the bureaucracy or business, knows of this annual blitzkrieg on leftover budgets. For public servants, May and June is a time to spend; for businesses, it is a time to sell.

Different takes: former Coalition finance spokesman Andrew Robb said evidence of end-of-year waste was "stark" and ...
Different takes: former Coalition finance spokesman Andrew Robb said evidence of end-of-year waste was "stark" and "damning". Finance Minister Mathias Cormann is more equivocal. 

The goods or services don't really matter; they can be training courses, consultants' advice/research, stationery, computers, labour hire, office refits or graphic design services. The motivation is the "use it or lose it" approach to public sector budgets (though it happens in some large companies, too); the fear that, if an agency or program fails to spend its allocated funding, the Finance Department will cite the underspend as evidence it doesn't need that much money.

This problem's existence has always been officially denied ("Of course public servants don't waste money – that would be contrary to policy!"). So two years ago I tried to find some quantitative evidence of it. I downloaded about 150,000 government contract notices and then looked only at the short-term contracts (two months or less), which I figured were more likely to represent discretionary spending. (Complex, long-term procurements are obviously unlikely to be the fruit of alleged last-minute "splurges".) This test was imperfect but the outcome was stark: public service agencies approved more than three times as much spending in May and June as they did in other months.

That was enough for the Coalition's then finance spokesman, Andrew Robb, to demand a formal inquiry. With his party poised to win office a month later, Robb said: "This analysis is remarkable and damning. We will charge a commission of audit to look into this if we win government ... We will make it a priority." He said the commission would also investigate whether to give agencies greater scope to carry over funding from one year to the next, so as to eliminate this perverse incentive to spend rather than save, and whether to increase scrutiny on spending during the last quarter of the financial year.

It didn't happen. Robb was switched to the trade portfolio after the election. And Tony Shepherd's commission of audit reports didn't mention the issue.

So what does the latest data say? I refined the approach a little, so as to examine only contracts with a length of one month or less. That's 122,401 contracts over seven years, worth $9.9 billion in total. It's only 2.8 per cent of the value of all contracts (short and long-term), but it's a significant enough sample for the purpose of analysing discretionary spending. The results speak for themselves (see the graph). In 2014, the first full calendar year of the Abbott government, there was a June bias of 4.4 – that is, agencies were 4.4 times more likely to spend money via such contracts in June than in other months.

Yet as significant as this may sound, the June bias in 2014 was actually much lower than in the previous year. Bartos was right: 2013 had been a shocker. As the Gillard government rushed to its inevitable demise, agencies approved 12.7 times as much short-term spending in June as they did in other months of that year.

The results were highly uneven across the bureaucracy. Some departments – Health (28.6) and Human Services (24.9) – had extraordinary June biases in 2014. Others had no significant bias at all. However, if one examines the seven full years of contract data that Finance has made available, the average June bias across government is 5.5. In other words, this is no statistical blip: public servants, for whatever reasons, spend with an at-times manic urgency in June.

So what does Finance Minister Mathias Cormann think of what his colleague Robb once described as these "remarkable and damning" findings, and why didn't he tell his commission of audit last year to investigate them? Cormann wouldn't comment on the commission's omission, though he told the Informant he wouldn't tolerate waste (which is what any minister would say).

"Irrespective of when spending occurs, every departmental secretary is personally responsible to ensure taxpayers' money is treated with respect in their portfolio. We expect them to spend taxpayers' money wisely and to eliminate all waste," the senator said.

This is no statistical blip: public servants, for whatever reasons, spend with an at-times manic urgency in June.

"Since the election, we have worked hard to cut much of the waste and duplication across government which we inherited from Labor. We will continue to be uncompromising in the pursuit of waste and will not rest until any inappropriate expenditure has been eliminated."

Nor did Cormann respond to a question asking whether he would examine this issue further (I assume he won't).

His department took another approach: it argued there wasn't a problem. A spokeswoman for Finance said: "The narrow scope of your analysis offers no proper, direct and definitive insight into the quality of procurement activities and as a result cannot be used to assert that the government is undertaking irresponsible spending behaviours. Short-term contract dates cannot be used as a proxy for expenditure, as the amount of expenditure this represents is extremely small when considered against the full range of contract expenditure. The full data set [of contracts] demonstrates clearly that June is not the highest month by value; in fact it is only the fourth-highest month by value, for contracts to begin."

Which is true, but it misses the point that long-term contracts, which account for the vast bulk of government spending, are irrelevant when searching for potentially wasteful end-of-year spend-ups. Indeed, analysing contract start dates only makes sense if they're short-term contracts. (The department did make some useful observations about alternative methodologies to mine: read its response here, which comes to a different conclusion.)

So given that Finance denies that the bureaucracy tends to spend towards the end of the budget year, it didn't respond to a request for an explanation as to why this might happen. I can't fathom why the department insists that it can't see this particular elephant. Most ACT-based consultants readily confirm that May and June are when the floodgates of public money are opened; they regularly complain about (but also benefit from) the deluge of work that comes their way.

Bartos, a former deputy head of the Finance Department and a consultant, has seen the problem from both sides. He says that because "wasteful end-of-year spending has become a commonplace discussion among gatherings of public servants, there seems no reason for the government to pretend it does not exist".

"Some advisers still think that controlling all information, and only admitting to a problem if the government has already solved it, is the best political strategy. Indeed, one of the reasons to have a Finance Department is because bureaucracies everywhere tend to be budget maximisers, bringing as many resources under their own control as they can – it's known as a principal-agent problem," he says.

"While there can be exceptions, clearly there is a tendency there among some bureaucrats; there is a well-established economics literature on the topic. It is one of the important reasons for having a finance agency to look at departmental budgets and give ministers independent advice."

Cleary, this is advice neither Cormann nor his predecessor, Labor's Penny Wong, received.

While the Finance Department won't discuss why the June bias exists, several senior public servants did offer the Informant some reasons in private. Each acknowledged a tendency in some areas of government (not theirs, of course) to overspend before July, but they also argued the practice was less prevalent than it had been. One sound reason for spending late in the financial year, especially in straitened times, was prudence: a sensible financial manager holds off on approving expenses until they are certain they have enough money in their budget to pay for them, which might only be known by, say, as late as April or May.

However, Bartos doubts that prudent management explains anything other than a small portion of the trend. "If it were, you would expect the trend to be reasonably uniform across major departments, assuming they have roughly equivalent standards of management, but it varies widely between agencies. It also does not seem to correlate in any way with what other evidence – for example, audit reports – suggests are the better-managed departments."

Of course, just because public servants spend more in June doesn't mean that those purchases are unnecessary. But the scale of the June bias suggests something is awry. There is other evidence, too, that this spending is likely to be wasteful. Five years ago, two American researchers – Jeffrey B. Liebman and Neale Mahoney – wrote a paper, Do expiring budgets lead to wasteful end-of-year spending? Their study wasn't necessarily analogous to Australian government contracting – e.g. it examined US government spending on IT alone.

However, the researchers were able to compare the time of spending with separate data on the quality of spending. They found that "spending spikes in all major federal agencies during the 52nd week of the year as the agencies rush to exhaust expiring budget authority. Spending in the last week of the year is 4.9 times higher than the rest-of-the-year weekly average". More importantly, "average project quality falls at the end of the year. Quality scores in the last week of the year are 2.2 to 5.6 times more likely to be below the central value".

In other words, end-of-year spending was demonstrably wasteful in at least one study of government procurement. Decades of anecdotal reports suggest the same is almost certainly true of end-of-year spending in Canberra. What will it take to convince a government to even scratch the surface of this problem?

Update: For an alternative take on this issue, I encourage you to read Finance Department senior executive John Sheridan's article "Mythbusters: does the government waste money in June?".

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