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Public sector productivity

The cost to deliver a given level of public services is determined by input costs (eg, wages, physical assets, technology systems and consumables) and productivity - how efficiently inputs can be converted into outputs such as hospital operations. Public sector productivity is poorly measured in New Zealand and around the world. Better information on public sector productivity would make it easier to identify less effective policies. Nevertheless, based on the information we do have, our baseline assumption is that annual productivity growth in the public sector (0.3%) is about one-fifth of economy-wide labour productivity growth (1.5%). This relatively low rate of public sector productivity growth is due to both the nature of the services (which tend be labour intensive with less scope for technological advances) and the operating environment (one without competitive market pressures).

If public service productivity is lower than economy-wide productivity, then public services will become more expensive relative to other goods and services in the economy. This is because, over the long run, wage rates are likely to be similar across both the private and public sectors, with those wages growing in line with economy-wide productivity.

A more productive public sector could be an important part of the solution to our long-term issues, by getting more for the money that is spent; but this would mean significant change. The sustainable debt scenario implies, because spending across government is constrained, that the state sector workforce will have virtually no growth over the next 40 years. The challenge for the State sector is to deliver better public services without more resources.

A lift in public sector productivity would have a positive impact on the notional basket of services that could be delivered to the average New Zealander for a given level of spending. A 0.5 percentage point increase in our baseline assumption for annual public sector productivity growth, if sustained, would result in around 20% more public services per person after 40 years.

Figure 6.5 - What individuals receive from the Government - inflation-adjusted
Figure 6.5 - What individuals receive from the Government - inflation-adjusted.
Source: The Treasury

To have a significant impact, most improvements in the fiscal position will need to come from the major spending areas such as health, education, justice and superannuation. How such gains might be achieved in these main spending areas is discussed in more detail in section 7. But even in the core public sector there is potential to think about how to deliver more, for less. This includes government departments which account for around 18% of core government spending and employment (with $12 billion in annual operating expenditure and 44,600 employees in 2009).

The international management consultancy McKinsey suggests there is potential for public sector productivity improvements in various countries of 15% in the next 10 years from doing the same tasks in new ways, learning from the private sector and overseas experience.[10] It suggests benefits can be realised without major system changes through operational and business process improvement and shared services, such as streamlining finance, payroll and administration functions across government. In most cases, these solutions have not been employed in New Zealand, but the impact they can have is significant. For example, an initiative of the Canadian Government merged more than 70 services from a number of agencies into a single, customer service organisation. Savings of around $500 million per year were realised by finding efficiencies.[11]

But achieving these gains is difficult, requiring full backing from the government and wide application across the State sector. This could mean greater centralisation or collaboration and a shift in the way the public sector management system has operated, as the current structure tends to provide public sector chief executives with considerable freedom to manage their departments. Making a difference over the long term would require additional productivity gains to be found year after year, and productivity to be in focus over a long time horizon.

Another major way the government can lower the cost of public services is to focus on what is delivered and to test policies and programmes more rigorously for their effectiveness - and to stop those programmes that are not shown to be cost-effective. This may involve looking at who receives services - for example, whether they are targeted or not - and whether the government is best placed to provide them.

We have choices about such things. In the end, what services are delivered, and how, are the result of policy decisions. For example, the government used to provide telecommunications services and now there are several private sector providers instead.

But policy choices and the public debate do not necessarily focus on improving productivity. This is because too often the public debate does not sufficiently differentiate between what is spent on purchasing inputs, and the outputs and outcomes that result from this spending.


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