Keeping the Squeeze on Government Expenditure

Statement made by Adrian Wimmers, Partner, KPMG

Today’s Budget signifies a further step in the Government’s ‘sinking-lid’ approach to stemming a decade long trend of government expenditure increasing relative to GDP.

The Government’s stated agenda is to shift New Zealand’s economic focus to savings, productive investment and exports. An area of focus of this budget is to tighten the squeeze on low productivity, core government expenditure and return this expenditure to investment on high priority frontline services, infrastructure or to reducing deficits.

In doing this the government intends to release resources to the productive sectors and so increase New Zealand’s capacity for sustained economic growth.

In this Government’s two previous Budgets, public sector expenditure was, in the main, tackled through pressure on departmental expenditure, in essence the cost of running the Wellington bureaucracy. In particular the Government focused on reducing costs in the ‘back office’ – roughly 10 per cent of departmental spend – and redirecting savings to frontline services such as the police, nurses and teachers. This focus continues.

Government departments are expected to find a further $980m over three years once they absorb the impact of staff retirement scheme costs, previously funded centrally. The Government has also signalled that further negotiation of savings targets will follow after the Budget.

It is clear that the expectation of further value for money savings won’t disappear under this Government. This means more services and better advice with fewer resources. To achieve this, Government departments will need to focus on new ways to use their resources more efficiently and effectively – from the back office right up to the front line.

Many departments have yet to grasp this particular nettle with both hands. Savings to date have generally represented the ‘low hanging fruit’ rather than smarter changes such as fundamentally rethinking business processes and service delivery models.

Budget 2011 has signalled that the Government expects officials to achieve harder-to-get savings on top of the easier ones already delivered. The challenge they face is that long-term improvement, whether delivered through a merger or a new IT system, requires investment to realise the gains.

This creates an immediate conundrum for the Government. Smarter delivery of public services has an up-front price that will need to be found within the reduced government spending track announced today.

ENDS

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