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Sustaining Growth: Briefing to the Incoming Government 2005

Chapter 4: Improving the performance of the public sector

Improved public sector performance is the third major challenge facing Ministers. New Zealand’s public sector is sound, but could still do better. Better performance from the public sector will assist in meeting fiscal goals and rising public expectations of services. Improved performance will assist growth in the economy by adding directly to productivity, and can free up resources and improve the quality of services to New Zealanders.

Ministers face spending pressures and rising expectations

Economic growth has meant that there is more funding available for providing services. Economic growth and increased spending also increase expectations. For example, international experience shows that as countries get richer they also tend to want to spend relatively more on health. Core social spending areas such as health, education and superannuation will be areas where Ministers will face rising expectations, fiscal pressures and hard choices.

While New Zealand is currently well placed fiscally, the rate of spending increases experienced in recent years will need to slow significantly to ensure longer-term fiscal sustainability.

It is important that Ministers have mechanisms to improve performance and manage fiscal pressures.

In the short term, if Ministers wish to move quickly, options are available for reprioritisation of spending. Some of these could be put into effect in Budget 2006.

However, reallocation of existing spending generally takes time. In the medium to long term, more robust prioritisation of expenditure to align resources with government priorities could be provided through reviews of agencies and current programmes. The sooner Ministers make decisions about which areas to review, the greater the ability to create room for significant initiatives in Budgets 2007 and 2008.

Processes designed to free up resources and improve the performance of the state sector require a focus on both the quality and value for money of spending. However, the mechanisms used to promote the two can differ and might create tensions between the two goals.

Getting value for money?

Ministerial and public concerns about the quality of overall spending have increased. The growing base of spending also means that the cost pressures associated with that base (from wage and price inflation) become larger in nominal terms.

The growing state sector wage bill

There has been a significant increase in the state sector wage bill over the last six years. The increased costs are driven by a combination of increased numbers of staff and wage increases across the core public, compulsory education and public health sectors.

Figure 17: Personnel expenses in the state sector
Figure 17: Personnel expenses in the state sector.
Source: The Treasury

Different key drivers are identifiable in each sector.

In the public service there have been significant increases in the numbers of employed (27% between 1 July 1999 and 1 July 2005, compared with a 20% shift in the private sector). Some of the increase can be explained by bringing functions into the core from the wider state sector, and a significant proportion has provided for strengthening of front-line delivery. A significant proportion has also provided for an expansion of head offices. These increases have occurred across 76% of core agencies, suggesting that they are not being channelled in areas of greatest need. Increased staffing costs have not been offset by a reduction in consultancy costs.

In the compulsory education sector demographic changes, shifts in teacher-pupil ratios, and changes in policy around contact time have driven employment numbers, combined with wage settlements that have tended to be at a level higher than those in the wider economy.

In the public health sector the impact for the government has been driven by a recent shift to funding key settlements centrally.

There is little information to indicate that New Zealanders are getting more services and better results from the public sector for the large increase in resources provided. What little information exists is not encouraging.

Ministers and the public are frequently surprised by poor performance. Fair, reliable and cost-effective public services inspire public trust and create a favourable environment that contributes to economic growth. State sector performance problems can also weaken public trust. Surprises for Ministers can also lead to them having few options for dealing with performance problems, often leading to stop-gap funding measures.

Improving state sector performance

There needs to be a greater drive for performance (in terms of both effectiveness and efficiency) across all parts of the state sector. Our public management system has a number of recognised strengths, such as sound fiscal management and good public service ethics. New Zealand has a strong accountability focus, complementing freedom to manage for boards and chief executives. However, we could do better in providing for more focus and incentives to drive performance in a forward-looking sense.

There is no one solution to these issues. Responses need to focus more on changing incentives and ultimately the behaviours and culture in the public sector, using current tools and levers rather than introducing new ones, and shifting the focus so that public and ministerial expectations and needs drive public sector performance.

Performance means better results from money spent

A focus on performance means not just focusing on how much is spent, but also on what that spending achieves. Performance encompasses both productivity and the effectiveness of services. This involves looking for:

  • the best results from the money spent, ie, value for money and spending aligned with government priorities and policies, and
  • continuous improvement over time, including increased productivity.

A range of approaches and incentives can enhance performance. Incentives should support good use of information and decision-making at all levels, from Ministers to front-line staff.

  • A demand for performance driven by Ministers is a powerful incentive and motivator, as demonstrated in the United Kingdom, for example. The leaders of agencies also play a significant role in shaping behaviours and performance, which places importance on chief executive and board appointments and performance reviews.
  • Having information available publicly about what results are being achieved for the money spent is a powerful incentive for decision-makers. Very little information is currently publicly available regarding expectations, targets, costs, productivity and value for money. Benchmarking information or league tables are possible options.
  • Increasing the choice of service provider can improve the quality of services provided to the public, while private provision of publicly funded services can elicit cost savings. The use of market-based incentives has been effective, for example in the case of state-owned enterprises (SOEs). User charges may be used effectively in other areas, especially where individual users derive a lot of the benefit.

Using the range of incentives to change behaviours, central agencies can support Ministers to lift performance in the longer term.

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