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‘A lazy cost-saving measure’: the Coalition’s efficiency dividend hike may mean longer wait times and reduced services

On the eve of the election, the Coalition has said it will impose a higher “efficiency dividend” on public service agencies over the next four years in an effort to cut public service spending and address the budget deficit.

An efficiency dividend is a measure, first introduced by Labor in the late 1980s, that reduces the budgets of public sector agencies by a certain percentage.

The current efficiency dividend is 1.5%, but the Coalition has promised to boost the figure to 2% for the next three years, with Treasurer Josh Frydenberg saying:

What we are doing is offsetting that spending with an increase in the efficiency dividend by half a per cent, which will raise more than A$2.3 billion […] The annual departmental bill across the Commonwealth is about $327 billion. What we’re saying is it will be reduced to about $324 billion, as a result of this additional measure.

Across-the-board cuts to the public service via the so-called efficiency dividend represent a blunt instrument to achieve budgetary savings.

They have been used by both sides of politics over the years. They allow politicians to avoid taking responsibility for cuts on the pretence they are only about efficiency and that the public sector agency heads can manage them with no impact on services to the public.

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But many reviews, including by parliamentary committees, have revealed the efficiency dividend often does impact the level and quality of services, particularly for smaller agencies and particularly over time.

It can lead to increased charges, reduced services (for example, the Bureau of Statistics’ Year Book no longer comes out annually) and increased waiting times.

While Labor has strongly criticised the Coalition’s proposed increase in the dividend, its criticism is a little hollow as it has said it will retain it.

Labor is also proposing an additional cut in spending on administrative expenses through cuts to funding of consultants, contractors and labour hire – only some of which will be redirected to new public service positions.

The Thodey report

Of course, taxpayers should expect the public service to pursue efficiencies and increased productivity – administrative expenses should not be automatically increased in line with increases in input costs. In particular, there is scope to use technology better to drive down costs and improve service provision.

But this requires new investments as recommended by an independent review of the Australian public service, led by David Thodey AO.

Following the Thodey report’s release in 2019, the government agreed to an audit of its current IT investments but we are yet to see that audit.

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Nor has any mention been made of new investments that might deliver the efficiencies the government expects, let alone achieve the improved services Thodey was looking for.

In the absence of a more nuanced and targeted approach to efficiency gains, there a the risk of further reducing the capability of the public service.

It is likely to mean further reducing resources for longer-term research and being less able to enhance public service wages where there is a need to attract key skills (such as in information technology).

A lazy cost-saving measure

While Labor and the unions are highlighting the likely impact on public service numbers, I would be less concerned on that score if the measure was genuinely about efficiency.

The concern I have is that this is not only a lazy cost-saving measure: it also reflects antipathy towards the public service as an institution.

We have seen this before with the imposition of staffing caps, in addition to the caps on administrative expenses. These have forced greater use of consultants and labour hire, even where this is less efficient than using public servants.

And we have seen it in the rejection of key Thodey report recommendations, not only about removing the staffing caps but also about enhancing the role of the public service commissioner. This would have ensured more merit-based senior appointments and a more appropriate way of setting pay and conditions.

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