James Whelan | Public Service Race to the Bottom

This article was first published on ABC’s The Drum here.

The Gillard Government’s announcement last week to cut public sector spending by $1.5 billion is unwise fiscal policy, out of step with community attitudes and a significant broken promise.

Increasing the efficiency dividend from 1.5 per cent to 4 per cent will tighten the vice on Australian Public Service agencies that are already stretched after two decades of belt-tightening. The direct consequences will include contracted services and increased workloads.

The shaky rationale for increasing the efficiency dividend has received widespread criticism from economists and other commentators. This is not an intelligent or evidence-based strategy to motivate innovation, economy and creativity but a blunt instrument that can reduce or compromise agencies’ outputs. After 20 years, few agencies have further room for further cuts without reducing their core functions. Government reviews of the mechanism in 1994 and 2008 found that it places significant stresses on agencies and recommended alternative measures be investigated.

Treasurer Swan last week justified the increase in the efficiency dividend by invoking the bipartisan obsession with a rapid return from a modest deficit to modest surplus. This is now widely recognised as an unhealthy fetish. Australia has a remarkably low level of public debt and a low level of public sector investment. A survey conducted by Essential Media just this month found that more than 70 per cent of Australians support deferring the return to surplus in order to maintain public services. Other surveys during the last 20 years have found strong support for increasing public sector spending, even if it means increasing taxes.

Before releasing the Mid-Year Economic and Fiscal Outlook (MYEFO), Treasurer Wayne Swan admitted that it would be, “counterproductive to take an axe to the budget in these uncertain times for the global economy”. This was echoed by Deloitte Access Economics Director Chris Richardson who argued that the fate of our surplus was in Europe’s hands and that, during turbulent times spending cuts are unwise. Peter Martin observed that a $40 billion deficit was inconsequential in the context of the Commonwealth’s budget of one third of a trillion dollars and that OECD forecasts have Australia’s economy growing faster than any other developed nation in the coming year.

Describing the increase as a ‘one-off’ measure was no more than spin. Last year’s budget included a ‘one-off’ increase in the efficiency dividend from 1.25 per cent to 1.5 per cent, and there was another ‘one-off’ increase to 3.25 per cent in 2008. In July 2010, Prime Minister Gillard pledged that the Government had “no agenda or plan to cut overall public service numbers”. In July this year the Treasurer committed to maintaining the efficiency dividend at 1.25 per cent and ensuring that efficiency gains are realised “without resorting to job cuts”. This week’s announcements contradict these prior commitments and indicate a change in Labor’s public sector policies.

How will public service cuts affect the Australian community?

Firstly, services are likely to contract. The workforce of the 130 agencies that comprise the Australian Public Service has not kept pace with the growth of the Australian population. This week’s budget cuts have been predicted to result in up to 3,000 retrenchments, further widening the gap between growing community expectations and diminished agency capability. This will be experienced soonest and most acutely by community members who rely most on public services, increasing social and economic disparities.

Secondly, a protracted program of retrenchments would have direct and visible economic consequences, especially in cities and towns with significant numbers of public servants. Between 1997 and 1999, the Howard administration retrenched almost 30,000 public servants. Four years later, the impact was still visible in closed businesses and empty shop fronts, according to the Member for Canberra Gai Brodtmann.

Thirdly, despite Minister Wong’s assertion that some savings might be found by reducing spending on consultants, the job cuts prompted by the increased dividend could be more likely to increase the Government’s long-term dependence on expensive consultants for policy advice. Governments of both persuasions have relied heavily on consultant advisers: the Rudd government spent almost $800 million on 6,534 consultancy contracts during its first 18 months. If the rollercoaster trend in public service firing and rehiring in the last two decades is repeated the short-term cost saving will be costly in the longer term. After gutting almost one-third of the public service and spending $300 million on redundancy packages in its first year, the Howard government steadily rebuilt agencies to restore the required capability.

Deferring the return to surplus is one of several obvious alternatives. Cutting fossil fuel subsidies could save more than $10 billion and reduce carbon emissions. Restricting the first home buyers grant to new housing could save up to up to $600 million a year. Redirecting the private health insurance rebate to direct spending on hospitals (Treasury’s advice) could save over $1 billion.

We need strong and capable public services to build Australia’s resilience in times of global uncertainty. Instead, Australia’s major parties are locked in a race to the bottom.

James Whelan is the Research Director for Public Service Research Program at the Centre for Policy Development.