6.2  A high-performing public sector

6.1.1  Government savings and productivity

The Treasury's long term projections of the Government's capacity to supply goods and services underline the stark choices facing New Zealand and the vital role of productivity:

“…we simply can't keep doing what we have done without significantly increasing taxes or debt.” (The Treasury 2009)

The government's fiscal position deteriorated sharply from 2006, with substantial spending and tax decisions contributing to shift the Crown's operating balance from surplus to deficit, from plus $9.5 billion in 2006 to a projected minus $9.1 billion in the current year, and from saving to dissaving. At present, the government is borrowing some $300 million per week of longer-term debt (or $13.5 billion a year) - around 7% of GDP.[15]

The 2009 long-term fiscal projections were updated last year to reflect changes in the 2010 Budget. These produce lower debt-to-GDP levels in 2050 than previously forecast, but population ageing and other costs pressures still produce rising debt levels and an unsustainable fiscal long-term position. As new information comes in, the forecasts will continue to move about, with the effect that the 2050 debt-to-GDP levels forecast in Budget 2010 will be attained a few years earlier or later.

In the updated 2010 analysis, the base case projection, with government debt held to a sustainable level and public sector productivity growing at 0.3% annually, shows the supply of public services per capita in real terms declining in every year from 2013 to 2022, to about 8.5% below the current level, then slowly recovering to the current level in 2046.

However, if productivity growth is doubled to 0.6% per annum then the period of contraction of per capita services reduces from 33 years to 15 years; and by 2050 the annual level of services is 17% above the current level, compared with the base case's 5%.

Further testing of productivity options showed that if public sector productivity increased by 2% per year for five years and 1% per year thereafter, there would be no period of contraction, and growth in the supply of public services would be faster than the historic trend growth rate (Figure 6.1).

Figure 6.1: Real public services per capita under different productivity scenarios

Source:  The Treasury

Alternatively, the same volume of public services as in the base case could be delivered and government spending reduced by $6 billion in 2020 and $25 billion in 2030. This would reduce net government debt by 33 percentage points of GDP in 2030.

Allowing public services to grow at the historic trend growth rate, with productivity growth at 0.3% a year and debt unconstrained, results in net core Crown debt at over 100% of GDP in 2050. And with productivity growth at 0.6% a year, net core Crown debt still increases from under 20% of GDP now to almost 60% in 2050 (Figure 6.2).

These debt profiles are clearly not viable for New Zealand and the protracted contraction in public services isn't really either. This is why raising public sector productivity is important, both in terms of its implications for the community, and in terms of options for increasing national saving.

Figure 6.2: Net core crown debt with public services growth at historic trend (% of GDP)

Source:  The Treasury

It is important to emphasize that “productivity” and “improvement” are not simply camouflage labels for cost-cutting. There will be some, but the essence of the changes needed is more effective leadership, top-down and bottom-up initiatives to harness the thinking and ideas within an organization, supplemented by better practice, systems and technology from elsewhere, to produce more value, more efficiently. This is simply “business as usual” good practice in the private sector, and a common by-product when done well is a more empowered and enthused work force.