In government, small isn't always efficient
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In government, small isn't always efficient

The evidence on public sector efficiency tends to be ignored or twisted to suit other agendas.

Commentators across the political spectrum acknowledge that Australia's government finances have a structural deficit. Disagreement persists on whether this is a ''spending problem'' or a ''revenue problem'', and analysis concentrates on the relative extent to which government spending is increasing or tax revenue is decreasing.

This debate partly misses the point by focussing too heavily on the past. We need to debate what we should do in the current circumstances. This debate must not be blind to historic and foreseeable trends, but should focus on the role of government. Equally important are questions about government efficiency. Once government objectives are determined, we must consider how we can achieve those objectives with minimum resources. Budgets, and their associated papers and statements, should contribute significantly to these efficiency questions.

A key theme of the 2014-15 federal budget was ''smaller and more rational government'', and many items throughout the budget papers were related explicitly to it. Indeed, Finance Minister Mathias Cormann released a ministerial paper on the topic on the night of the budget to provide an overview of the initiatives under this theme. The foreword to this paper makes it clear that the initiative's primary aim is increased efficiency, yet it is obvious that only some aspects of efficiency were considered. It details the savings to be achieved and the unnecessary duplication of some existing arrangements, but contains minimal discussion of the value provided by those bodies abolished, consolidated, merged or transferred. No information is given on the priorities for the selection of particular bodies above others. No selection criteria are implied, apart from a stated desire for ''leaner, business-like ways of operating'' and a commitment to release ''an Australian government governance policy later in 2014''. In substance, the decisions appear to emerge more from a largely unstated or hidden agenda about the role of government than an explicit analysis of efficiency.

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Cormann describes four principles, drawn from the commission of audit's recommendations, as ''significant principles that could be applied to both existing government bodies and proposals to establish new bodies''. These include:

  • ''whether a current or proposed body performs a public function properly belonging to the Commonwealth'';
  • ''whether a government body is necessary to provide the function'';
  • ''whether functions can be grouped more efficiently into a small number of government bodies''; and
  • ''whether government bodies have the appropriate type of legal structure to achieve their purpose in the most efficient and effective manner''.

Sunset clauses for government bodies are also contemplated. Whatever the wisdom of these principles, they are not determinative of why certain bodies have been deemed surplus (such as the Clean Energy Finance Corporation and the COAG Reform Council) instead of others. The principles, particularly the first relating to functions, merely raise questions rather than guide the answers.

The bodies affected are drawn from a range of different portfolios. The two largest savings are in foreign affairs and trade (the consolidation of AusAID within the Department of Foreign Affairs and Trade, saving $397 million) and in health (savings of $142 million from abolishing Health Workforce Australia and consolidating its functions into the Health Department). These two items make up more than 80 per cent of the savings. All the others produce relatively small savings (none over $23 million). Some are doubtless necessary. Nevertheless, the assumption appears to be that smaller government and larger multifunction agencies are more efficient. This does not appear to have been an examination of how best to achieve aims with minimum resources, but simply an attempt to minimise resources.

To the Abbott government's credit, compared with non-specific measures such as the efficiency dividend, the cuts made under the ''smaller and more rational government'' initiative have the advantage of clearly specifying which programs are affected. However, in a budget of over $400 billion, they are not highly significant. For example, the total ''smaller and more rational government'' savings achieved by cessations and mergers is $530 million. This is less than one-fifth of the savings produced by the efficiency dividend (about $2.8 billion), an across-the-board cut that affects services regardless of their utility. The latest budget increases the dividend by 0.25 percentage points in 2014-15, 2015-16 and 2016-17. This is on top of a previous increase by Labor to 2.25 per cent, resulting in a total dividend of 2.5 per cent in those years. It specifies the savings will be ''targeted in areas such as reduced advertising, consultancy and travel costs and deregulation efficiencies'', but efficiency dividends can lead to staff cuts that counteract efficiency.

The efficiency dividend

Governments have employed different strategies to promote efficiency within their public services. Unfortunately, the data on which strategies have been most successful is relatively poor. The main mechanism used to drive efficiency improvements across the Australian Public Service as a whole is the efficiency dividend.

Most federal public sector bodies are subject to an annual efficiency dividend that reduces administrative budgets by a certain percentage each year on the assumption that ''efficiencies'' will be found to do the same work with fewer resources. The dividend has been in place for over 25 years, originally implemented by the Hawke government. It is not unique to the Commonwealth; most state governments have applied an efficiency dividend in the past, and it is also used overseas.

The amount that budgets are reduced by is usually 1.25 per cent, but it has varied. While the dividend may have provided savings and spurred administrative imagination, evidence shows it has had a number of unintended negative outcomes and is ineffective in achieving efficiencies while maintaining the quality of public services. A series of reports have given increasingly poor evaluations. More recently, the audit commission criticised the measure as a ''blunt instrument'' and advised against high efficiency dividends, saying savings should be the result of conscious choices about the government's role.

Alternative strategies for driving efficiency exist. Given the growing consensus on the flaws of the dividend, they should be trialled. One strategy is to implement rolling budget audits. These regular reviews would provide an evidence base for identifying potential inefficiencies and developing ways to address them. Such a strategy has the potential to drive significant efficiency gains, but implementation is not straightforward and it is essential that the reveiws' structure be carefully considered. The reviews should include internal participants from various areas (e.g. policy, frontline delivery, finance, IT and strategy) and from different levels of seniority. It should also involve an external body, such as the Australian National Audit Office, to give the advantages of objectivity, independence and a broader perspective.

Another option is formal agreements on efficiency targets and plans to achieve them, made between senior managers, relevant ministers, employees, unions and stakeholders for each agency. These are not the only alternative strategies. Others exist, and combinations of strategies are also possible.

Christopher Stone is the public service research director at the Centre for Policy Development. This is an edited extract from the report False economies: unpacking public service efficiency, which he wrote with Emma Cheyne, Matthew Wilkinson, Neha Kasbekar and Stephen Neverley.

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