Efficiency Dividend is inefficient: Danger of waste on the way to a surplus.

Download ‘Beyond the Blunt Instrument: The Efficiency Dividend and its alternatives’

Jennifer Doggett’s paper from the Centre for Policy Development examines the flaws caused by blanket budget cuts and puts forward alternatives.

The Efficiency Dividend – the main mechanism used to drive performance improvements across the Australian Public Service (APS) – has been chipping away at public service budgets for 20 years. While initially it may have helped reduce excess spending, its effects are now eroding the ability of government agencies to provide core services.

In the 2010 election campaign, Shadow Treasurer Joe Hockey announced that a Coalition Government would increase the Efficiency Dividend to 2% if elected as part of a plan to deliver a Budget surplus ‘twice as big as Labor’s’. There are reports that the Government is also considering an increase in the Efficiency Dividend.

But the bean counting associated with the Efficiency Dividend is no trivial matter. The way in which we use public sector resources has a profound impact upon the sort of society we live in now and that which we leave behind for future generations.

Our latest paper ‘Beyond the Blunt Instrument: The Efficiency Dividend and its alternatives’ by CPD Fellow Jennifer Doggett discusses the many problems caused by the Efficiency Dividend and recommends alternative measures.

“The Efficiency Dividend is an easy way for Governments to hide overspending and bring Budgets back into surplus. However, this short-term electoral advantage occurs at the expense of essential public services which improve our individual and community well-being over the longer term. There are better ways to promote efficiency within the public service which don’t compromise the role of public sector agencies or risk reducing the quality of service delivery”, the paper’s author, Jennifer Doggett said.

Jennifer illustrates what’s wrong with the Efficiency Dividend in her upcoming opinion piece in the Public Sector Informant magazine in The Canberra Times:

“As anyone who has tried budgeting knows, there is a limit to the effectiveness of most cost-cutting measures. People who buy expensive take-away food for their work lunches will find it relatively easy to save money by bringing food from home instead.  However, those already taking homemade sandwiches every day will struggle to reduce their spending further and still provide nutritious lunches.

After 20 years of the Efficiency Dividend, the public service is now at the ‘vegemite sandwich’ stage of budgeting. Spending has been cut back to the point at which Departments now need to reduce core functions in order to deliver ongoing savings.”

Jennifer continues:

“As two parliamentary inquiries into this policy have demonstrated, smaller agencies and those with a central policy function are particularly hard hit as they find it more difficult to undertake the ‘creative accounting’ required to meet savings targets.

For example, one practice, reported by public sector employees consulted as part of the Centre for Policy Development’s research, is for organisations to artificially inflate the budgets of new policy proposals (exempt from the Efficiency Dividend) in order to offset the savings required elsewhere.

This continued focus on reducing public sector budgets – no matter what the cost – reflects a fundamental misunderstanding of the nature of the public service.”

The limitations of the Efficiency Dividend were recognised by the ‘Moran’ Review of public administration which recommended considering alternative options for promoting public sector efficiency. Ahead of the government taskforce undertaking this review, CPD’s latest paper, based on international research and interviews with current federal public servants, offers some key points:

• The Efficiency Dividend is counterproductive – not only is it starting to have a harmful impact on service delivery, it actually creates incentives for long-term inefficiency in some cases.
• International experience does not support the Efficiency Dividend as an effective mechanism to improve public sector performance.
• Alternative approaches to promoting public sector efficiency have the potential to increase efficiency without compromising service delivery.

The paper makes a number of recommendations for alternative evidence-based measures, including seeking input from employees, unions, clients and other stakeholders into the development of savings targets and the ways in which they can be achieved.

The paper outlines key principles that should underpin a new approach to promoting public sector efficiency.

“If Australia wants a high performing public sector in the future, we cannot risk continuing with the Efficiency Dividend”, Ms Doggett said.

DOWNLOAD ‘Beyond the Blunt Instrument: the Efficiency Dividend and its alternatives’