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Cut spending by cutting government

By Alex Philipatos - posted Friday, 30 May 2014

Plans to double the efficiency dividend from 1.25% to 2.25% indicate the government is lazy about designing public service cutbacks.

For over two decades, the federal government has looked to the efficiency dividend as a means of cutting costs in the public sector. But the dividend has significant problems, and most notably, it has failed to stem rising departmental costs in recent years.

The efficiency dividend is an annual cut to the funding which government agencies receive to manage their running costs. Agencies receive payments from the treasury to cover two main types of expenses – departmental expenses (running costs, such as wages and office expenses) and administered expenses (programs costs, such as payments to families or subsidies for industry).The efficiency dividend applies only to departmental expenses.


Throughout the 2000s, departmental expenses rose from $32 billion to $52 billion, or 23% in real terms. This was despite an efficiency dividend of between 1% and 3.25% operating throughout the period.

One of the main costs which the public sector has failed to contain is its wage bill. The public service has grown top-heavy since the early 1990s, and salaries have risen fast at the top. These two trends have contributed to a more expensive public service.

For example, the number of entry-level public servants (APS1 and APS2) declined 90% from 1991 to 2013. At the same time, top-level management (Senior Executive Service) grew 50% and middle management (Executive Level) more than doubled. In the early 1990s, managerial employees comprised 15% of the public service, yet by 2013, they comprised 30%.

Public service salaries have also grown significantly, particularly at the top. Base salaries for top-level management grew between 25% and 35% in real terms from 2002 to 2012, compared to 15% at lower levels. Not only is the federal government employing more managers, they are paying them higher salaries.

Apart from its inability to contain these costs, the efficiency dividend has other issues. Public sector agencies themselves argue it is a blunt instrument to drive down costs. The dividend applies to efficient and inefficient departments alike, which has the perverse effect of punishing agencies that have already achieved efficiencies, and rewarding those that can hide savings to use at a later time. A more targeted approach would apply the necessary cost pressure to wasteful areas.

But the dividend is also susceptible to gaming. Departments unable or unwilling to make the necessary cutbacks can submit proposals for new policies to gain additional funding. Some of the resources awarded can then be used to prop up existing spending. This leads to a raft of unnecessary projects destined to be ineffective.


Fundamentally though, the efficiency dividend does not tackle public sector costs at their source. Government is spending more because it is doing more. New programs require greater spending, and a properly resourced bureaucracy to administer them.

Simply applying an efficiency dividend allows ministers to avoid harder questions about which agencies and programs will be kept, and which should be scrapped. This responsibility is instead handballed to departmental heads, whose priorities will not necessarily align with those of the government.

Agency heads have little incentive to recommend the abolition of their own agency when it means eliminating their own job, or those of their colleagues. Nor will they easily cut programs they favour.

Ultimately government agencies need regular independent review, so that ministers can make informed decisions on the public service. A review should be used to measure the performance of programs and agencies both on cost and effectiveness. Savings can be made simply by decommissioning programs which continually fail to meet their objectives.

Most importantly, the government needs to ask itself whether certain programs are a legitimate function of government in the first place. If the government is to become more efficient, its first port of call should be to eliminate functions that citizens ought to receive through the private market.

The government has made some positive first steps in announcing cuts to over 200 spending programs and abolishing or merging 70-odd federal agencies. If the age of entitlement is truly over, however, citizens should be looking for the government to do even less.

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About the Author

Alex Philipatos is policy analyst at the Centre for Independent Studies.

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