Contrary to what Peter Dutton would like the electorate to believe, reducing administrative waste will save very little money. If Dutton is serious, he would review major capital projects which lack proper evaluation, starting with his uneconomic nuclear energy proposal.

Dutton has done his best to make inflation and the cost of living the major issue at the forthcoming election, and, according to opinion polls, he seems to have succeeded – or at least so far. However, inflation is now coming down and in the current March quarter underlying inflation is probably back within the Reserve Bank’s target range of 2-3% (see my article in Pearls & Irritations, 1 Feb).

Nevertheless, according to Dutton, inflation would have been lower if the Albanese Government had spent less, with less waste. Thus, as Dutton put it last weekend: “A major cause of homegrown inflation is rapid and unrestrained government spending.”

The government’s response is first that in two of its three budgets it ran a budget surplus, something the Coalition never managed to do while in government between 2013 and 2022. And in its third budget for the current financial year, 2024-25, the deficit is only 1.0% of GDP, which is quite small.

Second, the latest Treasury forecasts for the current financial year show that Australian Government payments represented 26.5% of GDP, almost the same level of expenditure as in the Coalition’s last budget in 2021-22 when payments were 26.4% of GDP.

Further, there is plenty of evidence that under the previous Coalition Government many public services were under-funded. For example, hospital waiting lists blew out, schools were under-funded relative to their approved resource standards, waiting times for welfare payments and for veterans compensation were far too long, and delays in the visa processing system led to increasing numbers of unauthorised migrants.

The Albanese Government has sought to remedy these areas of under-funding as well as providing targeted cost of living relief. Those families most in need have been helped with increased rent assistance, making medicines cheaper and boosting bulk billing, providing energy bill relief, and reducing the cost of childcare. And all this extra assistance was funded while maintaining an adequate budget balance.

Indeed, it is open to doubt that public expenditure is too high in Australia relative to the demands for adequate public services. Total public expenditure in Australia was only 38.9% of GDP in 2024, which is lower than all other developed economies in the OECD, except for Ireland, South Korea and Switzerland.

Further, Australia is more than four percentage points less than the OECD average of 43.1% and more than 10 percentage points less than the average for the Euro area of 49.4% for budget outlays relative to GDP. The significantly greater spending on government services in all these other countries, including even the US, is an indication that Australia needs to spend more if we want good government services.

Better value for money

On the other hand, even if we are persuaded that public expenditure in Australia is not too high relative to our demand for public services, we should still be concerned that we obtain value for money from the taxes that we pay.

So, it would be good if Dutton could identify the areas in which he proposes to make savings. But unfortunately, that is exactly what he refuses to do, probably because he cannot.

Dutton’s only specific savings proposal has been to sack the 36,000 extra public servants that he says have been hired since the Albanese Government was elected. Dutton’s justification is that he doesn’t “think any Australian can say that their lives are easier in terms of their interactions with government agencies because of 36,000 new public servants in Canberra".

Dutton, in his ignorance, doesn’t seem to know that only a quarter of these extra 36,000 public servants are located in Canberra. The other three quarters are located in cities and towns all over Australia because that is where they are providing services directly to the public and reducing waiting times.

The reality is that if we want public services then we must expect the size of the public service to increase in line with the population and labour force. The Coalition likes to refer to 2006-07 when setting a cap for the size of the public service, but as the last Budget Papers make clear the size of the APS in 2024-25 will be “about 17,000 below the level that would be consistent with the relative size of the public service in 2006-07".

Further, reducing the public service by 36,000 would, in fact, make very little difference to total public spending in Australia. The cost of administrative services only represents 14.8% of total budget payments, so that even a cut of 36,000 public servants would only reduce total budget outlays by a maximum of 2½%. More realistically, however, any such saving would represent closer to 1% of total budget outlays if allowance is made for lower average salaries and the costs of alternative labour hire.

Efficiency versus value for money

Seriously, reducing staff numbers in a quest for greater efficiency is not the way to achieve significant budget savings.

The only time in the history of Australia when real Australian Government budget outlays have fallen for each of three years was in 1986-87, 1987-88, and 1988-89, with a total reduction in budget outlays over the three years equivalent to 5.1% of GDP.

I was Secretary of the Department of Finance during those years, and we did not pursue efficiency savings. Instead, under the management reforms of the Hawke Government, the line managers in the spending agencies were considered best placed to identify and pursue possible efficiency savings.

The budget rules incentivised these managers to achieve these possible savings as they could keep the proceeds. However, they were also charged an efficiency dividend, which was roughly equivalent to productivity growth, so they were under considerable pressure to find savings in their administrative costs.

But the big savings and the focus of the Department of Finance was on getting better value for money by evaluating the cost-effectiveness of all government programs on a rolling basis and all new spending proposals as well. The staff of a central agency like the Department of Finance are not well placed to assess the details of another department’s administration, but the Finance staff have the policy skills to evaluate how cost-effective spending programs and their supporting policies are.

Further, as the programs account for 85% of Australian Government outlays, inevitably that is where big savings can be made. That is how total real spending was reduced back in the 1980s by getting better value for the money spent.

In particular, large savings are possible from capital spending on infrastructure and defence equipment, where many projects have not been properly evaluated before they are commissioned.

Looking ahead, the obvious place for Dutton to make savings would be to ditch his nuclear energy proposal. According to Dutton, the cost of his proposed nuclear energy system would be as much as $331 billion. But all the expert advice is that it will be much more, and very likely more than twice as much as his costings (see my article).

Nuclear energy is clearly not cost-competitive. Indeed, that is why it will have to be financed by taxpayers, whereas renewable energy is privately financed by householders and investors.

In sum, if Dutton was serious about tackling government waste, the obvious place to start would be to ditch his commitment to nuclear energy. But he won’t and that means that any claims he might make as an economic manager cannot be taken seriously.