Because the election approaches, and with each events dedicated to massive tax cuts for high-income earners, the issue of financing even modest electoral commitments is changing into evident.
Consequently, we're seeing a resort to time-honoured expedients for saving cash in ways in which seem painless. Labor has promised to scale back spending on consultants and conduct an “audit” of presidency waste. The federal government has responded in sort with a plan to extend the annual effectivity dividend imposed on the general public service, from 1.5% to 2%.
The effectivity dividend was first imposed below the Hawke authorities in 1987.
Formally, the thought was motivated by the then-nascent data know-how revolution, which was anticipated to yield spectacular positive factors in productiveness. Behind this rhetoric was a perception held by many within the authorities that there was loads of slack within the public service, and that managers might discover financial savings in the event that they needed to.
Three and a half a long time on, the cumulative impression of the effectivity dividends is an actual discount of between 40% and 50%. That ought to have produced an enormous saving.
However the actuality is kind of totally different. As with most office-based companies, the precise prices of working the general public service have risen over time, even after adjusting for inflation. The variety of public service staff has risen, as has the common actual wage they earn. What has gone mistaken, and what are the teachings that must be realized about effectivity dividends?
First, whereas we've got seen wonderful progress in technological phrases (a smartwatch has extra computing energy than the quickest supercomputers of the Eighties), this hasn’t translated into huge productiveness positive factors. This was already changing into evident to astute observers when the productiveness dividend was launched. In the identical yr, the Nobel prize-winning economist Robert Solow noticed: “You see the pc age all over the place however within the productiveness statistics.”
The truth is, throughout the economic system as an entire productiveness progress has been gradual. The microeconomic reform program of which the effectivity dividend was an element delivered some preliminary positive factors however these rapidly petered out.
Nonetheless, labour productiveness progress has averaged about 1.5% yearly, suggesting to some observers that an effectivity dividend at this charge is sustainable. The issue with this argument is that labour productiveness progress is the supply of will increase in actual wages and dwelling requirements. Whereas wage progress has fallen considerably in need of productiveness progress, the concept actual wages could possibly be held indefinitely at 1987 ranges is a nonsense.
The one method to safe persevering with effectivity dividends could be if productiveness within the public service grew extra quickly than for the economic system as an entire.
How then, has the effectivity dividend been sustained? The reply is that the effectivity dividend quantities to an computerized minimize within the provision of public companies, with the selection of what to chop being left to particular person departments and businesses. The financial savings are then used to announce new packages, a lot of which do little greater than fill the gaps created by earlier cuts.
It’s simple to see the political enchantment of this course of to governments of both occasion. The cuts related to the effectivity dividend are too small to be seen in any given yr, and may’t simply be recognized. Against this, the brand new packages they finance give ministers loads of alternatives to make themselves fashionable.
As quite a few experiences and unbiased analyses have concluded, the cumulative impact of unplanned cuts is to hole out the core capacities of governments, whereas loosening self-discipline on new packages. Two penalties of this course of are significantly noticeable.
First, at the same time as the fundamental features of presidency have been eroded, we’ve seen a gradual improve in low-level pork-barrelling, exemplified by the sports activities rorts and station automobile parks scandal. Initiatives that ought to have been undertaken, if in any respect, by state and native governments have as an alternative been alternatives for federal ministers handy out novelty checks.
Second, since coverage evaluation is a straightforward goal for cuts with little preliminary impression, we’ve seen growing resort to high-priced consultants to do work that ought to have been undertaken in-house. And this brings us again full circle, to Labor’s promise to chop spending on consultants. That’s a good suggestion however not a supply of free cash to be allotted to fund election guarantees.
The one sustainable method to cut back spending on consultants is to extend the coverage capability of the general public service.
That in flip means scrapping effectivity dividends.
John Quiggin is an Australian laureate fellow in economics on the College of Queensland
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