Cutting the slack and saving the budget

With uncertainty surrounding the growth prospects of European and US economies, and a languid non-mining economic performance in Australia, attention has again turned to how the federal government will achieve a budget surplus in 2012-13.

Despite their best rhetorical efforts, government ministers in recent months have softened their stance to now enlighten us that the surplus is now an 'objective' rather than a steadfast policy commitment.

But as the economic scene worsens internationally, there is heightened speculation that the government will have no choice but to belatedly add to the customary efficiency dividend policies by eliminating some existing programs to meet its budgetary promise.

A chorus of politicians, including Greens leader Senator Bob Brown, and business representative organisations, have not aided the fiscal consolidation cause by lambasting the surplus policy as a political ploy lacking economic merit.

Others, such as the Centre for Policy Development, have sprung up defending the commonwealth public service against the prospect of cost savings through a reduction in government employment.

A recent CPD report purports to show that the case of bloated, or excessive, government employment is overstated. According to the CPD figures, if we compare ongoing APS employment against population growth then the total number of Australians per public servant has increased from 1991 to 2009.

In the opinion of the report's key author, James Whelan, this trend means that the 'service delivery capacity of the APS has diminished.'

Alternative measures, drawn from ABS wage and salary earner statistics over a longer period, show a similar trend but it is unclear that such indicators tell us much about the appropriateness of existing public service employment.

As the CPD report rightly notes, it is true that small-government adherents such as me have suggested that numerous employees within the commonwealth public sector do not deliver any frontline services of any kind.

To a great extent this is a product of deliberate policies to reduce the extent of commonwealth services delivery, as exemplified by privatisation in the areas of aviation, banking and telecommunications from the 1980s to the mid-2000s.

Most economists agree that such microeconomic reforms were appropriate, enabling the more efficient private sector to innovatively deliver a range of additional services to customers at lower costs in real terms over time.

While the CPD report bemoans our successful privatisation record there is no credible evidence, apart from a few nationalisation agitators in the recent debate over the Qantas dispute, that most Australians are clamouring for a return to an era in which the commonwealth assumed the commanding heights over a wide range of services.

The divesture of government assets played its part in reducing commonwealth government employment, but its effects were temporary as total public sector numbers once again increased over the previous decade to 243,700 people in June 2010.

A considerable number of these extra commonwealth public servants are solely engaged in policy advisory, administrative and regulatory roles that unnecessarily burden business with obligations inimical to the encouragement of entrepreneurship and a broader growth in the economy.

These burdens will only worsen when the carbon tax administrative machinery, to accompany the Climate Change Department, possibly becomes a reality next year.

And these trends do not fully account for the growth in outsourcing of government work to private sector contractors, a number of whom were themselves public servants retrenched during the period of APS rationalisation during the late 1990s.

Another factor which must be taken into account when considering the appropriateness of public service size is the increasing commonwealth policy influence over functions and services traditionally undertaken by the states.

This erosion in state policy autonomy has enabled the federal bureaucracy to mushroom in areas such as education and health, blurring financial and policy accountability to taxpayers and provoking intergovernmental blame games abhorred by most Australians.

Those arguing against retrenchment within the public service as a way to reduce the budget deficit effectively argue that the existing size and composition of the APS is optimal, and must be quarantined from further rationalisation.

It follows from this argument that the government should only seek to return the budget to surplus and pare back public debt by seeking explicit tax increases or gamble on future economic sunshine delivering additional government revenue.

There is little doubt that these propositions are instinctively supported by the current government as a matter of political principle.

This is because as domestic manufacturing industries continue their slow decline, the public sector unions have gradually displaced manufacturing unions as kingmakers within the wider trade union movement.

And spending cuts won't please public sector union members whose livelihoods depends on maintaining, and indeed growing, government expenditure.

Election survey statistics also show that the majority of public sector workers tend to vote for left of centre political parties, leaving the Gillard government to believe that it is best not to bite the political hand that feeds it.

For these reasons there is little surprise that the Australian federal government has shown so far that it reacts to calls to reduce the size of the commonwealth public sector in a manner similar to someone who endures a toothache.

But to overlook opportunities to consolidate the budget by cutting expenditure, including reducing public service numbers where the role of commonwealth government is inappropriate or no longer relevant, severely limits our options to regain fiscal credibility and sustain economic prosperity.