Rob Whitfield: why public sector cuts are needed even during surplus

By Harley Dennett

Friday June 24, 2016

Robert “Rob” Whitfield, group executive of Westpac Institutional Bank, listens during a Bloomberg Television interview at the World Economic Forum (WEF) Annual Meeting of the New Champions in Tianjin, China, on Thursday, Sept. 11, 2014. The meeting runs through Sept. 12. Photographer: Brent Lewin/Bloomberg via Getty Images

The prospect of producing his first government budget in his first year of public service was somewhat daunting, Rob Whitfield admitted to an audience of NSW public sector insiders on Thursday morning.

The ex-Westpac executive turned Treasury secretary has had a few days to process the reaction to the budget papers across 6199 separate news stories not including social media responses. Most have been extremely positive, using words like cautious and responsible. NSW is a state that can demonstrate surpluses and the state economy is leading the nation on jobs, consumer confidence, business investment.

But if the numbers in black and white paint an outlook of continuing surpluses with record investment in services and infrastructure, why is there still an efficiency dividend? With nearly no net debt, why the continual pressure to make cuts?

The public service must prepare for the coming challenge, Whitfield says, which he likens to the state being a victim of its own success: as the economy grows its percentage share of the GST revenue falls.

“We do have surpluses, right through to 2019-20,” Whitfield told the IPAA NSW breakfast briefing. “But we, especially in the public sector, need to take a longer-term view than just what’s there at first sight, and think about how we are going to respond to the challenge that is evident behind these numbers and that is a declining revenue story.”

NSW share of GST pool
NSW share of GST pool

So where are those surpluses coming from? Mostly from one-offs. “Legitimate one-off’s,” Whitfield clarifies. An asset recycling deal with the Commonwealth that will net nearly a billion, as well as national partnership funding for highways. But by 2017-18 the GST revenue drops off dramatically.

At the height of the cycle, NSW is up around 32% of the GST pool — close to its what its per capita rate would be, but now it’s heading into a period where it will recoup the lowest rate of GST since the regressive tax system was established in 2000. The total gap is about $10.8 billion relative to the highpoint in the cycle over a four year period. Whitfield see this as a call to action for the entire sector:

“If your revenue is declining in such a marked fashion, you need to respond. We need to cut our cloth to responsibly match that revenue profile.

“We’ve got an expense growth of 3%, that’s what’s in your agency budgets … but a revenue growth of only 2.3%. That’s a challenging equation and not consistent with the undertaking the government makes about its fiscal responsibility.”

What could be coming down the pipeline that would allow Treasury officials (or ministers) to believe this equation is OK? Whitfield says you have to believe that certain policy outcomes will occur, like the electricity transactions, which are not recorded in any of the budget numbers. When you add them back in, you end up with a revenue profile of 3.4% — marginally above the 3.0% expense profile.

This is a common picture around the world, Whitfield adds, and public servants must understand that declining revenue means they need to response on the expense side of the ledger.

Wages cap may come down further

Expense restraint is coming in a number of forms, including wages, efficiency and budgeting practices, as well as redesigning services from the bottom up.

The restricted wage policy is an example of how the state acted quickly to reduce spending, but also where further cuts may be required. The current cap on public sector wage growth is 2.5%. Whitfield told the less-than-pleased audience of public servants it may come down further:

“When that was first brought in it was leading the nation down in terms of wage restraint. Now, five years later, with inflation down in the 1%, it’s starting to look a little generous. That’s something as the treasury we’ll continue to look at, to see if it’s the appropriate setting for that declining revenue picture.”

Similarly the efficiency dividend doesn’t tend to excite public servants. At 1.5% its stable, but not going away. Whitfield asked them to look on the bright side; at least it empowers them to decide for themselves what trade-offs to apply:

“The efficiency dividend does empower the secretaries to look at their expense base and apply that dividend and it gives them the autonomy to apply it in the way they feel is most appropriate for their particular circumstances.”

Savings will also come from financial management transformation, which is about delivering government accountability and transparency by matching government spending to service standards. More real-time data for program budgeting will help the NSW public sector understand what output-based budgeting looks like, Whitfield explains, so instead of focusing on inputs, they can focus on outputs — something the public sector does that Whitfield is intimately familiar with.

The new Commissioning and Contestability Unit will improve the quality of government services and use of public funds by exploring service delivery models involving government, private and non-profit providers.

The Data Analytics Centre will inform solutions to complex challenges by sharing data from multiple agencies and targeting resources to where they are needed.

Lastly, there will be continual processes of examining government agencies for streamlining to reduce waste. There are now 3600 fewer public servants in the state. However, in the frontline services there have been increases 3000 more teachers, just over 1100 new police, and 4700 more nurses and midwives. Whitfield says that is testament to the efficiencies already identified in the public sector.

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