The Efficiency Dividend - A blunt instrument

Governments of all persuasions are usually keen on implementing efficiency measures across the public service, particularly in their first term.

This is often sold as a mark of responsible budgeting and keeping the bureaucracy in check. Phrases such as “cutting red tape”, “reducing the size of the back office”, “trimming the public service” and “investing in front line services” are all familiar cries.

In New South Wales all public sector agencies are required to return an efficiency dividend based on a percentage of the budget. For the 2018/19 financial year and the forward estimates, a 3 percent dividend is to be returned by agencies.

The current government expects to save around $1.6b over the period to 2021/22. For some of the larger agencies with budgets in excess of $10b, this could be as much as $300m to be identified in savings each year.

While the figure for the 2018/19 financial year and the forward estimates has been set at 3 percent of budget, the portion of each agency’s budget to which this relates is not openly published.

In response to questioning at the 2016/17 Budget Estimates, it was stated that the government “has undertaken since elected to impose modest efficiency dividends that target back office spending, allowing the government to invest more on the frontline and maintain a strong fiscal position”.

As a budget strategy, the efficiency dividend is a blunt instrument. It is based on assumptions that the “back office” and the “frontline” may be similarly defined across all agencies. It also assumes that efficiencies can be easily identified and delivered in the back office, without impacting adversely on frontline services.

An across the board percentage to be delivered by all agencies also assumes that each has a similar proportionate capacity to identify efficiencies or savings.

Additionally, there is a tendency to market the reduced expenditure realised through efficiencies as savings, rather than reinvestment in other forms of service delivery or infrastructure.

It would be a rare commercial organisation which would apply this type of “equally across the board” logic to all of its divisions or business units in an attempt to improve its bottom line.

A far more economically responsible approach would encompass a comprehensive assessment of public sector service delivery and the identification of efficiencies which may derived. While this approach may require significantly more analysis by Treasury and agency officials, and consequent robust cabinet discussions, it would realise more rational efficiencies.

The difficulty in adopting this approach would be in the selling. Governments would need to justify to constituents why particular agencies are being identified to give up larger proportions or, in extreme cases, cease to exist. Perhaps this is why Treasurers opt for a perceived egalitarian approach.

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