How efficient is Australia’s public sector? Short answer: very

Is Australia’s public sector delivering the right levels of ‘bang’ in return for our ‘bucks’? AAP/Tracey Nearmy

How efficient is Australia’s public sector? This question is difficult to answer with precision, but important to all of us. After all, this is our money being spent on us and the things we care about. We have a right to expect that we are getting the best possible “bang for our bucks”.

My recent research for the Centre for Policy Development looks at the evidence we have to answer this question. The indications are that Australia’s public sector compares extremely well internationally, and does as good a job as the vaunted efficiency of the private sector.

The international evidence is that Australia’s government is highly effective compared with similar nations. The World Bank’s measurement of government effectiveness places Australia as ninth most effective amongst OECD nations in 2010.

This should not be surprising. When considering the performance of Australia’s public sector in areas such as health and education, we will generally use comparisons with northern European nations who spend a great deal on their public services and generate very good results.

However, what is interesting is that Australia’s taxation levels are much lower than those of northern Europe. Instead, these levels are similar to low-taxing nations such as Korea and the US. In fact, Australia was the fifth lowest taxing nation in the OECD in 2010.

To appreciate what this means about Australia’s efficiency, the following scatter-plot shows OECD nations’ rank in effectiveness and their reverse rank in taxation. The nations closest to the top right-hand corner have the highest effectiveness and lowest levels of taxation. Getting big results compared to the resources used (good “bang for your buck”) is an important aspect of efficiency, so these nations at the top right are the most efficient on this measure.

OECD nations ranked by lowest taxing and highest effectiveness (2010) Adapted from OECD, Revenue Statistics 1965-2010: 2011 Edition, 2011; and World Bank, Worldwide Governance Indicators, 2013.

It is possible to debate some aspects of the measurements behind this graph. This means it is indicative rather than precise. But, the clear indication it gives is that Australia is amongst the best in this aspect of efficiency. Australia performs similarly well in other aspects.

However, there is often a false assumption that all government bureaucracies are inefficient. This kind of thinking would argue that international comparisons merely show Australia to be the best of the worst. But the assumption that the private sector is always necessarily more efficient than the public sector is not supported by theory or evidence.

International research on outsourcing indicates that under similar conditions, public sector organisations in general perform similarly to private sector organisations. This provides a good indication that Australia’s public sector, which is more efficient than many similar public sectors internationally, would likewise perform as well as the private sector.

There is a significant complicating factor in the comparison of public and private sectors. Even where they may seem to be doing the same job, public sector providers of services often are expected to fulfil objects beyond simply providing the core service. As a result, they are actually doing a harder job.

Some of the difficulties can be seen in a report by the Productivity Commission on public and private hospitals. Although the two sectors operate in the same industry, the report detailed a number of differences in the jobs they perform. The public sector ran more hospitals in remote areas, engaged in more palliative care, did more teaching, did the vast majority of accident and emergency work, and had more children and young people as patients.

The Productivity Commission report attempted to statistically take into account these differences in its comparison. The findings were that the efficiency of each sector is very similar, with both having areas of strength compared to the other.

It is important to note that the Productivity Commission report acknowledged some weaknesses in its analysis, and it is not possible to be certain that all the additional responsibilities of public sector hospitals were fully taken into account.

So, it seems Australia’s public sector is lean and keen. However, this positive assessment should not be taken to imply that no improvements can be made to public sector efficiency. Further public sector efficiency improvements should be continually sought in order to ensure the most possible public value is gained from public funds.

Of course, any attempts to improve its efficiency must start from the understanding that Australia’s public sector is highly efficient. Unfortunately, the Abbott government’s new Commission of Audit makes no mention in its terms of reference of any need to establish how efficient government activities currently are before attempting to improve them.

This is concerning because there is a large difference in the reforms needed to fundamentally restructure a very inefficient government, and those needed to refine the activities of an already highly efficient government.

While striving for improved performance is important, previous achievements should not be taken for granted - or worse, reversed.