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Briefing to the Incoming Minister of Finance 2008: Medium-term Economic Challenges

The public sector will need to deliver more from existing resources

Improving the performance of the public service has been identified as an issue for some time; measures have been put in place to improve it but do not yet appear to be delivering the outcomes sought. The following section provides some examples of weaknesses in the current system based on a review of the public service undertaken from a value-for-money (VFM) perspective. A drive to improve VFM means finding better ways to achieve desired outcomes.

Current performance of the public sector

Government expenditure has grown as a proportion of GDP

Government
expenditure by function
Nominal
expenditure ($m)
% GDP
  2002 2008 2002 2008
Social security & welfare 13,485 17,877 10.7 9.9
GSF 676 690 0.5 0.4
Health 7,032 11,297 5.6 6.3
Education 6,473 9,551 5.1 5.3
Core Government Services 1,890 3,371 1.5 1.9
Law & Order 1733 2,894 1.4 1.6
Defence 1,162 1,562 0.9 0.9
Transport & communications 989 2244 0.8 1.2
Economic and industrial services 1013 2889 0.8 1.6
Heritage, culture & recreation 434 1,107 0.3 0.6
Other 507 1,055 0.4 0.6
Finance costs 2,118 2,460 1.7 1.4
Total 37,512 56,997 29.8 31.7
Total Crown expenses
Source: The Treasury

With a few exceptions, government expenditure has grown across the board as a percentage of GDP during a period of strong economic growth. The rate that expenditure has increased cannot be sustained even in the short term, given the current economic and fiscal climate, nor in the longer term with projected pressures from an ageing population. Ensuring the quality of spending – in both value and impact – is just as important as restraining growth in spending because it enables government to maximise what it gets from existing resources and provides opportunities for funding other priorities. Using public sector resources efficiently will contribute to New Zealand’s productivity by providing more services for a given level of labour, and freeing up labour to contribute to business production in the wider economy.

The public sector is struggling to provide assurances on performance and value for money

The state sector workforce as a proportion of the total workforce has remained relatively constant over the last twenty years

Composition of the New Zealand workforce
Composition of the New Zealand workforce.
Sources: Statistics New Zealand and State Services Commission

Within the state sector, the core public service has grown the most, by around a third, since 2000

Composition of the state sector workforce
Composition of the state sector workforce.
Sources: State Services Commission and Statistics New Zealand

While there is a link between significant policy initiatives and growth in resources, it is a challenge to link much of the increased funding to specific performance goals or gains. A “cost plus” approach appears to have been taken by agencies when proposing or discussing the provision of new services. In addition, some agencies have had significant personnel growth that does not appear to be warranted by the size or significance of the policy or services to which it is linked.

Over 40% of CEOs responding to a recent review on financial management capability in the public sector claimed that there were few incentives to identify or use savings. Increases in the level of unspent resources (under-spends) provide one indication that many sectors are now either over-resourced, or are not managing their resources optimally. The latter observation is reinforced by the practice of separate financial and operational reporting in 55% of government departments.

These findings provide broad support for concerns expressed by the Auditor General about the relevance and quality of performance reporting. There are marked information gaps in sectors where Crown entities dominate the delivery environment, particularly in the health and education sectors. Across the board, there is insufficient information explaining the link between the resources (inputs) used by government to purchase goods and services from departments and crown entities (outputs) to achieve specified outcomes (results). In short, we cannot say whether the resources being delivered represent VFM. Information required for external reporting is a subset of information required to manage an organisation. If information used in external reporting is poor, it seems unlikely that the quality of information used for internal management is sufficient.

The response will need to strengthen the most critical levers in the current public management system

Improving public sector performance

The nature of the services provided by the state and the complexity of the competing interests of the players involved, means that there is no “silver bullet” for improving public sector performance. To deliver greater VFM, we need to reinforce the principles of public sector management: clear specification of objectives; freedom to manage; incentives to perform; and provision of information on results. Making greater use of the system’s existing levers; for example, linking budget management and departmental performance to chief executive accountability, is likely to deliver better results than structural changes to the system at this point. A package to improve public sector performance should include:

  • ensuring Ministers’ priorities and expectations drive the public service, through clear communication and accountability with a priority on VFM
  • improving information on the performance of departments and Crown entities and the services they deliver to aid assessment of the extent to which the goods and services the government purchases have contributed to results that it wants to achieve
  • strengthening ex-post monitoring and accountability within the public service based on better information. A consistent standardised framework for assessing the performance of departments could help drive a culture change to make VFM a priority for the state sector and assure Ministers that their core priorities are being advanced. Over time, making results of assessments public could be considered to increase citizens’ stake in the performance of the public sector
  • learning from successful processes undertaken overseas, and adapting them to the New Zealand context, to review areas of government spending that require particular attention. For example, these could be led by the public sector or experienced private sector individuals and could take a number of forms. The UK undertakes Comprehensive Spending Reviews which set departments’ spending requirements, which include targeted savings for key departments as well as new performance management requirements and a sharper focus on key priorities. Other jurisdictions have implemented four-yearly reviews of agencies to identify the lowest VFM activities; set publicly stated targets and public reporting of progress; and established independent productivity measurement and reporting agencies, such as the Productivity Commission.

Managing short-term fiscal pressures

Living within the $1.75 billion operating spending increase set aside for future Budgets will be very challenging. Funding new priorities from this amount will be even more difficult. Fiscal savings will need to be made within existing expenditure to meet the costs of new priorities. Some spending areas, such as health, have the capacity to deliver service quality while living within a lower increment to spending than in the past. In other areas, such as justice, policy changes are needed to prevent rapid spending growth. There may also be a need to revisit pre-committed expenditure and reprioritising discretionary and low-value programmes to higher-value uses. In the medium term, efficiency increases and shifts of expenditure from low- to high-value uses will be necessary to achieve the Government's objectives.

To manage short-term fiscal pressures, current spending will need to be reallocated to new priorities

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