Rudd, Blair, and Reform of the Public Sector

Traditionally, centre Left parties have seen the public sector as a means to reform society and the economy. Conservative parties have focused their reform agenda on the public sector itself. The conservative push for smaller government has been based on the belief that smaller government means lower taxes and that the private sector can deliver services more efficiently than the public sector and so should replace it wherever possible. However, in recent times the burgeoning middle classes have demanded that a core group of services be delivered by the public sector and that the quality of those services be constantly improved. The debate between the centre Left and the centre Right about the size of the public sector has all but disappeared. Instead there has been the start of a radical reform focused on increased productivity and efficiency of the public sector in the United States and the United Kingdom by governments of both persuasions.

Curiously, under the Rudd government Australia appears to moving in the opposite direction, using the public sector as an agency of overall reform seemingly without any serious analysis of the costs and benefits or of the apparatus used to implement its reforms. The government has recognised that the mood of the electorate favours soft paternalism and more pervasive welfare. It has yet to confront the fiscal consequences of this approach.

Governments are victims of two opposing demands: the insatiable demand of the middle class for additional government services; and the requirement for fiscal discipline on the part of financial institutions.

The fact that contemporary electorates have a predilection for soft paternalism was evident in the Howard government’s adoption of middle-class welfare policies. However, as with the Rudd government, this recognition was not accompanied by any genuine attempt to change the way these policies were delivered. Tony Blair had a more complex policy approach which had as an objective the promotion of middle-class welfare as an antidote to traditional conservative outcomes, according to his chief architect of public sector reform, Sir Michael Barber:

The enabling state as proposed by Blair requires … first recognition that modern societies are diverse—in culture, ethnicity, lifestyle and aspiration. Whereas under the Attlee settlement after 1945, universal also meant uniform, in the twenty-first century only public services which respond to this diversity can be universal … In addition if they are to be universal, modern public services have to be so good that growing numbers of people who can afford the private alternative still choose them … Blair’s central political insight in domestic policy is the recognition that public services can only improve the lot of the disadvantaged if they also appeal to the middle classes.

The alternative according to Barber, who is now a McKinsey consultant advising governments on how to introduce more public services, is that:

The public services of the second half of the twentieth century would become in the new century private and paid for through insurance or at the point of use, with the residual public services becoming a mere safety net for those who could not afford anything better. This option is devastating for social cohesion or equity, but has the major benefit of allowing lower taxes. As the income of the majority grows it has significant appeal.

Public polling regularly indicates that voters would willingly accept higher taxes if they could have better services, but in future, governments are likely to come under increasing pressure to deliver both better services and lower taxes. This is implicit in the reform agenda emerging in the UK and the USA. It will be a catastrophe for the Rudd government and Australia if the same recognition does not occur here.

The Case for Public Sector Reform

According to Michael Barber it is essential that public services be delivered with increasing efficiency and productivity in order for them to continue to be affordable. In the case of the Blair government this was attempted through centralised command-and-control systems that managed outcomes, targets and operational plans. In the case of the Rudd government the device is the somewhat cruder efficiency dividend, which simply mandates reductions in funding without accompanying plans to achieve the reductions. The Howard government employed a similar approach but lapsed once the economy started to generate surpluses.

Inherent in this drive for efficiency is the recognition that, in a globalised world, governments are in competition just as much as businesses. Since any expenditure by government eventually becomes a cost to business or individuals, then the greater the expenditure by governments the less competitive business will become. The response of the private sector to this lack of competitiveness is likely to be contraction or relocation to another jurisdiction. Countries with the most efficient public sectors are more likely to attract investment capital and maintain sustained growth.

As Douglas Carswell and Daniel Hannan, two young Conservative politicians who recently published a critique of the Blair government, have pointed out, nine of the ten wealthiest countries in the world have populations of less than 10 million (the tenth is the United States). Partly due to their size, they also happen to have the most efficient public sectors.

Competition between governments is likely to mean that over time taxation of both income and capital will converge to a single set of rates which is common to all the major market economies (although the mix may vary slightly). Less efficient governments will have three options: become more efficient, cut core public services or face economic difficulties. The last two of these options are politically unsustainable. In Australia the problem is particularly acute for the state governments. As John Hill, the South Australian Minister for Health, is fond of pointing out, if South Australian governments do not make efficiency gains, by 2020 health costs will consume the entire state budget.

Several methods have been employed to promote greater competitiveness in the public sector but they boil down to two broad agendas: increasing productivity and reducing transaction costs. Strangely, governments generally have no methodology for measuring the productivity of the public sector. Yet in sectors such as health (and now defence), productivity is seen as the nub of an affordable system and is invariably used as the basis for wage claims by health workers. It defies common sense that governments have no mechanism for assessing changes in the productivity of approximately 40 per cent of their economies.

Unlike the United States, there is no focus on transaction costs in Australia or the United Kingdom. This is difficult to understand. The concept of transaction costs—the costs of delivering a service to the public—was originated sixty years ago by the Nobel Prize-winning economist Ronald Coase and has been further developed since by Oliver Williamson in the context of the competitiveness of firms. Williamson accounted for the fact that some large firms were uncompetitive, even though their size would lead to economies of scale, by the fact that their greater complexity led to greater transaction costs. Recently the notion of transaction costs has been applied to the public sector. Where analysis has been undertaken, the transaction costs for delivery of services and payments by the public sector have invariably been much higher than similar activities in the private sector.

Transaction cost economics appears to have been ignored by the Howard government. Howard and Costello made a virtue of reducing taxes and increasing welfare payments without any effort to reduce transaction costs. It will be interesting to see if the Henry–Harmer review of tax and transfer payments considers this issue but to date there is no evidence that the Rudd government is any more concerned by high transaction costs than its predecessor. By way of example, when the federal government introduced managed welfare for Northern Territory Aborigines the cost of introducing the program was more than 50 per cent of the funds being distributed: about $7000 per year for every recipient. This has been confirmed as an ongoing cost in the recent budget. In the case of some old-age pensioners, the cost of assessing their eligibility is many times greater than the funds they receive. The problem is that when welfare systems are complex, potential recipients invariably start rorting them, causing a tightening of the rules which, in turn, leads to greater and greater transaction costs.

The impact of transaction costs has been widely canvassed in public management literature since the mid-1990s when it was developed as a theme by Michael Barzelay, an American academic, now a professor at the London School of Economics, and a colleague, Babak Armajani. In their important book Breaking through Bureaucracy, they pointed out that:

Central authorities impose government controls, but departments and agencies at every level along the chain of delegated authority self-impose additional controls and constraints. The end result can be a disproportionate cost of controls, compared to the expected benefits, at the expense of fulfilling the mission of the organization.

The easiest way for a government to reduce the tax burden on the private sector is to reduce transaction costs. This can be done by introducing competition into the delivery of services (as the Howard government did with the Job Network) or to introduce new accounting techniques that measure the cost of delivery by agencies with the aim of reducing costs over time. American state governments use this approach.

Another method of reducing the cost of government is by ensuring that policies that are introduced are shown by evidence to produce worthwhile results.

Evidence-Based Policy

There is a case for believing that Blair’s and Rudd’s support for evidence-based policy is little more than spin. Rudd came to government committed to introducing his election initiatives, many of which, such as computers in schools, had not been supported by any analysis of the evidence. Since then he has extended the number of evidence-free policy initiatives, some of which have lapsed into obscurity while others, like the National Broadband Network, will impose an enormous burden on the economy and yet escape proper analysis.

Tony Blair has the same propensity for top-of-the-head initiatives. According to Douglas Carswell and Daniel Hannan:

In the run-up to the 2001 election he [Blair] wrote a memo that was later leaked, in which he explained that Labour needed some “eye catching initiatives” in order to regain public support. The memo contained one sentence which bears particular contemplation, “We also need far tougher rebuttal or, alternatively, action.”

In other words: make a headline-grabbing announcement for which there is no evidentiary basis and then put the boot into anyone who criticises it. This is a substitute for doing anything concrete. In contrast to this cynical approach which places politics above government, Lindsay Tanner observed recently, in a comment on evidence-based policy:

Every government dollar wasted on a poor program is a dollar a working person doesn’t have to spend on groceries, health care and education. It is also a dollar that the government doesn’t have to spend on its policy priorities.

It is a fair assumption that Tanner was not amused when Prime Minister Rudd committed $43 billion to the National Broadband Network without any analysis.

In a lecture in February the Chairman of the Productivity Commission, Gary Banks, pointed to the need for careful evidence-based policy development in order to reduce the risk of costly mistakes. In conclusion he said:

evidence-based policy making is unquestionably important, and it is encouraging that it has received vocal support at the highest political levels. However, measured against the various ingredients for an effective approach, it seems clear that the current practice continues to fall short … Not only is there a need to improve the quality of the public service to deliver evidence-based policy advice, there is a need for it to improve political understanding of what that entails. If we fail, it won’t just vindicate the public’s cynicism about the “Hollow Men” Syndrome, it will compromise government’s capacity to implement the beneficial national reforms that the country needs for the long term.

To give Blair his due, he did commission evidence-based analysis of policies after their implementation. In many cases the new policies showed no improvement in outcomes, yet Blair was reluctant to recognise the fact. The consequence has been intractable budget deficits, now made worse by the financial crisis without significant improvement in benefits to the community.

The Hidden Dangers of Policy Implementation

In a paper given to an Institute of Public Administration conference, Jocelyne Bourgon, the former head of the Canadian public service, said:

A good public policy is one that achieves the intended results at the lowest possible cost to society while minimizing unintended consequences. While policy decisions get the most attention, policy implementation is where success is defined. This is where we can see the difference between good ideas with no future and good ideas that will generate long-term benefits for the country. Implementation is where we learn how reasonable risk taking may pay out great dividends.

When Tony Blair took office he was aware of the need for good policy implementation. He sought advice from two key advisers, Sir Michael Barber and Professor Julian Le Grand. Barber was appointed head of the Prime Minister’s Strategy Unit and Le Grand was a key adviser on health and education. According to Le Grand there are four stages of policy implementation. Stage one involves relying on the experts; stage two is resort to command and control from the centre; stage three is decentralisation and response to the consumers; and stage four is quasi market competition. On Barber’s admission, after ten years the Blair government had only managed to get to stage two and policy implementation was no more than “adequate”. In his view adequate is not good enough. The public requires “good or great” service, which necessitates more than centralised command and control. Given that an Australian government must work with or through the states and that Blair only achieved an adequate outcome in ten years of close attention, reform of the public sector presents Rudd with a significant challenge should he choose to undertake it.

The Rudd government seems to be following a hybrid model: relying on the experts (through numerous reviews) and command and control from the Prime Minister’s and Deputy Prime Minister’s offices and departments. Rudd usually falls foul of what Barber sees as one of the failings of the Blair government:

Government is full of people who will generate policy, but often it is by no means clear that the sum total of the policies they generate will add to anything approaching a design or a strategy. In fact a more likely outcome than either of these is a series of initiatives. I know this from sobering experience in the first Blair term. I would ban the word “initiative” in government if I could.

Barber believes that public sector reform is critical for a government that wants to undertake large social and economic reforms. As he says: “public sector productivity is now the central challenge of domestic politics”.

In order to achieve his reforms to the delivery of public services Barber involved Blair in the management of departments in a way that makes Kevin Rudd look like a shrinking violet. Each minister and under-secretary was required to produce not only a set of measurable, deliverable outcomes but also a set of delivery chains for achieving them. Departments were subject to monthly progress reviews with the Prime Minister. Transparency became a critical component of each program, with all the outcomes published. Departments were given financial incentives to meet the projected outcomes and the Strategy Unit monitored the progress of each department and subjected them to outside evaluation. As time went on, departments were encouraged to introduce bolder targets involving higher risk and greater innovation.

How did it turn out? A collection of essays titled Blair’s Britain draws a number of conclusions. Transport and education policies are seen as not making progress and problematic, and the results in health and welfare are mixed, even though these were the areas where Blair devoted most attention. Carswell and Hannan have put together a random list of Blair policy implementation failures gleaned from the press that are, to say the least, hair-raising and cast doubt on Barber’s judgment that policy implementation was adequate. These include:

• 15 million people having their child benefit data lost in the post;

• A government facility that infected the British cattle herd with foot-and-mouth disease;

• 300,000 patient prescription forms that were lost;

• Prisoners absconding at more than one a week;

• Tens of thousands of holiday makers grounded by a breakdown in the passport agency;

• Thousands of student loan payments delayed;

• Poor people forced to repay tax credits which they were wrongly allocated;

• Disks containing information on British drivers mislaid in Iowa;

• 5 million tax self-assessment forms going astray;

• Thousands of newly qualified doctors that were unable to find posts because of the failure of the NHS computer system;

• Computer glitches in the benefits office that allowed £1.6 billion of welfare fraud.

Add the fact that departments have established units whose sole activity involves manipulating the system so that they appear to have achieved outcomes that are set by the Strategy Unit when in fact they haven’t, and it is clear that even the most assiduous management from the top has its limitations.

The Conservatives’ Answer to Public Sector Reform

Barber proposes four criteria against which to evaluate policy implementation: delivery of results; organisational health of the institution or service; efficiency; and public perception of the institution or service.

On these criteria the Blair government had mixed results. Barber conceded that the top-down synoptic approach had severe limitations. He favoured moving to devolved responsibilities that were responsive to customer needs. He also supported the notion of choice and quasi-markets as a stimulus to continuous improvement. However, he was thwarted by two political factors: Blair’s desire to try only those policies that were the result of political initiatives rather than evidence-based analysis; and Gordon Brown’s refusal to endorse financial devolution from the Treasury to local authorities. Brown was locked into a top-down “experts know best” mindset. No wonder he and Rudd get on so well.

Carswell and Hannan draw the same conclusion as Barber and Le Grand about the need for devolution and “quasi markets” as the basis for implementing responsive and efficient public services. They acknowledge the significance of an observation by Hayek:

There would be no difficulty about efficient control or planning were conditions so simple that a single person or board could survey all the relevant facts. It is only as the factors which have to be taken into account become so numerous that it is impossible to take a synoptic view of them that decentralization becomes imperative.

Unfortunately, as Carswell and Hannan point out, it is often difficult for a politician or a policy adviser to recognise when a synoptic view is impossible. They have a new Conservative paradigm for public sector reform, based on three principles:

• Decisions should be taken as close as possible to the people who are affected by them;

• Decision makers should be directly accountable;

• The citizen should be as free as possible from state coercion.

While these are sensible principles they are a long way from being a blueprint for responsive and efficient service delivery, higher productivity in the public sector and lower transaction costs. Carswell and Hannan have by and large ignored the lessons to be learned from America (although they do endorse the American practice of devolution of responsibility).

The American Conservative Paradigm

Imagine a community of 11 million people ranging from the very rich to the severely disadvantaged. They constitute the most ethnically diverse group on the planet. Each citizen is entitled to a range of federal, state and local services. When they want to access these services, on an individual or household basis, they log onto the internet and complete a simple application form of one or two pages. No one has any difficulty with the system; if they need assistance it is readily available. Once they complete the form their eligibility for services is assessed immediately. They are then given a menu of available services for which they are eligible. These can range from welfare and housing assistance through schools and hospitals they can attend to library cards and dog licences. They tick the services they want to receive and are provided with online application forms filled out and ready for submission or, alternatively, a list of providers, both public and private, they can contact. They are also given a designated case manager who will look after their interests irrespective of what they are and the jurisdiction which delivers it. Does this sound too good to be true? It isn’t. It is Michael Bloomberg’s New York.

Michael Bloomberg is, like Malcolm Turnbull, a conservative businessman. When elected as mayor he was disparaged for not being a politician. He was not a populist reformer like Ed Koch or a command-and-control operator like Rudy Giuliani, but he saw the need for reform of service delivery. In doing so he developed a system that is probably the ideal model of government.

Bloomberg managed to integrate federal, state and local governments into a one-stop shop through his portal “Access New York”. He allowed private sector service providers (such as schools and hospitals) to list alongside public sector providers to create a quasi-market. The service delivery model provided for customised services that met individual and household requirements and he encouraged the registering of complaints so that feedback could generate continuous improvement. Contact with the public was enhanced by the involvement of the personalised case manager.

In addition Bloomberg instituted a program of devolution of responsibility in key areas such as education and the police, together with greater transparency of outcomes.

As a consequence, New York’s transaction costs have been reduced and productivity has improved. The financial position of the city is significantly better than it was under his predecessors.

Conclusion

The Australian public service has long been acknowledged as a leader in public administration reform. These reforms have focused on organisational and management issues but have not addressed issues related to what, in the private sector, is called “value adding”. Nor is there much emphasis on innovation in policy implementation or productivity improvements. These are clearly matters that have to be driven by politicians and designated “change managers”. The approach by Australian politicians to public sector reform has been oblique and haphazard.

The Howard government outsourced the provision of employment services and made it more competitive. It also decentralised many procurement functions, a process that is currently being reversed. The dominant view of the Howard government was that service delivery was a matter for the states. It also had a vestigial predilection for smaller government.

Kevin Rudd indicated, during the 2007 election campaign, that he favoured a command-and-control arrangement whereby the Commonwealth was deeply involved in service delivery. He made it clear that the Common-wealth would take over health from the states if they did not perform adequately. But his government has not seriously addressed the core issues of public sector reform, even in respect of a command-and-control model.

The Rudd government has combined consensus policy, through the Council of Australian Governments, with an efficiency drive at the federal level. It has refused to allow the Productivity Commission to conduct cost-benefit analysis of key government policies, to encourage implementation planning or measurable outcomes for its own (as opposed to state government) service delivery, or to allow greater transparency or accountability (except by setting nebulous targets too far in the future to be meaningful).

There is an opportunity for the Coalition to develop a new approach based on better government, perhaps highlighting the need for good government now as opposed to “plans for the future”. The focus should be on service delivery that is better than adequate, governments that embody increasing efficiency and productivity, quicker recovery from the recession as a consequence of smaller deficits, greater business competitiveness and stronger growth. It would reinforce the reputation of the conservative parties as the better managers of government.

The Coalition would do well to adopt public sector reform as part of a new policy agenda. At the very least it should be criticising the flawed and potentially exorbitantly expensive approach of the present government.