Defence efficiency dividends: weeding the garden blindfolded
18 May 2017|

The Coalition went to the 2013 election with the promise of ‘no further cuts to Defence spending under a Coalition government’. That lasted until the 2014 Budget, when Defence was hit with a 0.25% increase to the non-operational efficiency dividend, albeit amounting to only $76 million over four years. Things then went quiet on the efficiency front for the next two Budgets, but we’ve recently seen $493 million cut from defence spending over four years.

How can we reconcile those cuts with the hoopla surrounding last year’s ‘fully costed’ and ‘affordable’ 2016 Defence White Paper?

The first round of cuts came earlier this year, when $189 million was cut under the auspices of a budget measure entitled ‘Public Sector Transformation and the Efficiency Dividend’. Despite sounding like the least-interesting Harry Potter movie ever, the measure was a one-off boost to the efficiency dividend imposed across government agencies from 2017 to 2019.

Efficiency dividends work like this: the government pretends that productivity growth is surging along in the public service (despite stagnant productivity in the Australia economy and abroad), and use that to justify taking money away. Impacts vary from agency to agency. Efficient departments have no choice but to reduce the quality/quantity of their services. Less efficient departments can either do the same, or cut unnecessary costs, which, because public sector agencies don’t have the discipline of turning a profit, can easily creep in. Even so, efficacy dividends are like weeding the garden blindfolded; it hurts the daffodils as much as the thistles.

In the 2017 Budget, a further $304 million was taken from Defence over four years due to a reduction in ‘contractors, consultants and business travel’. If the measure is extended in proportion to gross funding across the reminder of the initial White Paper decade, Defence will lose more than $1 billion. So, what do we know about Defence spending in the areas targeted? Table 1 lists Defence’s expenses on travel and consultants, along with the number of contractors reported in the annual report.

Let’s start with travel. Defence ceased reporting international travel separately several years ago, so we must make do with a single aggregate figure. Even so, a jump of $61 million in two years is noteworthy. That’s easily enough to fund 5,000 week-long business class trips to Europe or the United States each year. Chairman’s lounge anyone? Unless a surge in deployment-related travel explains the recent data, belt-tightening seems in order.

A doubling of expenses for consultants over two years might seem a lot, but you probably don’t get much change out of $3,000 a day for a defence-sector consultant. Nonetheless, that still implies 120 bright young things running around Defence with clipboards each and every working day. Again, the taxpayer will probably not shed a tear if Defence relies a little less on gun-for-hire MBA graduates.

Finally, there are the contractors. I’ve been arguing for years that Defence’s figures understate its reliance on contractors (see, for example, page 64 of the 2015 ASPI Budget Brief). In this year’s budget, Defence revised its definition so that there are now 2,087 on the books, so you can ignore the contractor numbers in Table 1. Assuming those folks are costing half the average $512,000 per annum paid to contractor filling positions in the submarine project a couple of years ago (see page 206 of the 2015 ASPI Budget Brief), the total bill still comes to $522 million a year.

It can make sense to use contractors (as opposed to expanding the public service workforce), if the positions are only needed temporarily; such as contracting a specialist engineer to help solve a one-off problem. But it stretches credibility to think that there are more than 2,000 such positions when the Defence civilian workforce is only 17,350. Once more, the case for an efficiency dividend looks more than reasonable.

On balance, the imposition of less than $100 million a year in efficiencies per annum on travel (cost: $236 million p.a.), consultants (cost: $91 million p.a.) and contractors (estimated cost: $522 million p.a.) is neither overly onerous nor unjustified in the circumstances. Not only is it a drop in the ocean of the $151 billion budgeted over the next four years, but it’s well below the financial gains to Defence from being indexed for inflation at 2.5% p.a. when the CPI has been running at around 1.75% since the White Paper. In those two years, Defence has received a windfall gain in buying power of around $500 million a year (1.5% x $34.7 billion).

Workforce numbers might not be a problem either—but not for the reason you might think. The planned growth in civilian numbers over the next several years won’t make up for fewer consultants and contractors. A target of 18,200 was set in last year’s White Paper to support new capabilities entering service. However, Defence’s civilian workforce is currently 600 positions below what was budgeted for in May 2016-17, so there’s clearly room to replace some of today’s consultants and contractors with tomorrow’s public servants. And, as we’ve seen, you don’t have to lose too many highly-paid outsiders to clock up $100 million in savings—30 consultants and 300 contractors should just about do it.

The question is whether Defence can attract the people it needs. Defence civilian individual and workplace morale is substantially below that of the ADF, and the last time civilians received a pay rise was back in July 2013. It takes more than carelessness to allow your workforce to decline by 600 positions more than planned in a single year.