The New Year always brings the promise of a new beginning. But it also confronts us with last year’s headaches. The problems we may have been only too happy to consign to the back of our minds as we enjoyed a summer break with family and friends.

For the National-led Government, the list of challenges inherited in 2023 is long. But few ministers will return to the Beehive with as daunting a task as Finance Minister Nicola Willis.

Core government spending in the current year is projected to be 74% higher than when Labour took office in 2017 ($140 billion, compared with $81 billion in 2017/2018). Adjusting for inflation brings the real percentage increase back to 39%. But even still, most voters would be unable to identify improvements in core public service outcomes - think health, education, or criminal justice – that might justify this increase.

The task for the new Finance Minister is to reintroduce fiscal discipline to public sector spending, and the public service itself should be a primary target.

But first, a word or two about the context of the Finance Minister’s challenge.

Treasury’s Half Year Economic Fiscal Update (HYEFU), released just before Christmas, forecasted an overall government fiscal deficit for the five years to June 2028 of $15 billion. 

In contrast, the incoming Labour-led Government in late 2017 was greeted with a Treasury forecast with cumulative fiscal surpluses in the five years to June 2022 of $26 billion.

Of course, a little over two years later, Covid intervened, and pandemic-related spending consigned Treasury’s 2020 fiscal forecast to the dustbin. But Covid is not to blame for the daunting deficits the Treasury now projects.

Where other OECD countries managed to reign in post-pandemic government spending, New Zealand under former Finance Minister Grant Robertson showed no such restraint. So much so that in the International Monetary Fund’s October 2023 Fiscal Monitor, New Zealand’s forecast primary government deficit featured as the third worst among advanced economies.

Willis’s mini-budget, delivered in tandem with Treasury’s HYEFU on 20 December, identified savings of $7.5 billion over four years. But with the Government seemingly committed to National’s tax cuts promises, much more radical solutions will be required to restore stability to the Government’s finances.

This column has previously identified two areas where big savings can be made: Where to wield the knife for spending cuts.

With New Zealand First as a member of the coalition government, the first of them - retirement spending - is likely to be politically impossible. 

But there should be no such political prohibition on achieving savings in the second area: the size of the public service itself.

When the Ardern Government came to office in 2017, the core public service comprised 47,252 full-time equivalent officials. Roll forward to 2023, that total had increased to a massive 63,117 FTEs, an increase of 15,865 or 34%.

At the average level of public service income reported by the Public Service Commissioner of $97,200, this increased headcount translates to an increased public sector payroll cost of over $1.5 billion a year.

The increase in headcount and payroll cost might receive some level of approval from voters if it primarily represented increases in critical front-line staff like teachers, nurses or police. But none of these key public sector occupations are included in the numbers.

Rather, the 63,000 FTEs largely represent the public sector’s bureaucracy or administration. It is here where the big increases in headcount have occurred.

For example, the number of public service ‘managers’ has increased from 5,333 in 2017, to 8,059 in 2023 (up 51%); ‘policy analysts’ from 2,633 to 3,949 (up 50%); and ‘information professionals’ from 5,437 to 9,426 (up 73%).

Of course, many officials do have public-facing roles. These include ‘inspectors and regulatory officers’ and ‘social, health and education workers.’  But, while these are two of the largest occupations within the public service, they have decreased as a proportion of the overall public service headcount. The big increases have been in management and administrative roles.

Drilling down to individual departments is also telling. Take the Ministry of Business Innovation and Employment (MBIE) as an example. From 3,366 FTEs in 2017, it grew to 5,832 in 2022 and to 6,282 in June 2023 – an increase over six years of 87%. Over that time, its management grew by 41 per cent. It now also employs more than twice the number of clerical and administrative workers.

It is the same story across practically every other government department. Employment at the Ministry of Transport is up 100 per cent, at the Ministry of Education up 64 per cent (from 2,632 in 2017 to a whopping 4,311) and at the Ministry for the Environment up 189 per cent.

When announcing her mini-budget, Willis rightly identified an “urgent need” for cultural change in the public sector to cut spending.

She reiterated National’s pre-election promise to get government departments to cut spending by 6.5 per cent. And she went further by saying she had asked government agencies whose staff had grown by more than 50 per cent since 2017 to cut spending by 7.5 per cent.

These cuts are too modest. Population growth since 2017 might justify some increase in the size of some parts of the core public service. But if the Finance Minister really wants to bring about a culture change within the public service, her starting point should be to return public sector headcount to 2017 levels.

As well as saving the taxpayer $1.5 billion a year in payroll costs, that would send a clear message to the public service about the need for public sector efficiency, productivity and fiscal restraint.

Yet, even at 2017 levels the size of the core public service may be too large.

In the first year of former Labour Prime Minister Helen Clark’s tenure as Prime Minister, public sector FTEs stood at just 29,070, less than half its current level. Since then, New Zealand’s population has grown 37% from 3.8 million to 5.2 million people. Applying that escalator to the public service would result in total FTEs of only slightly under 40,000 – more than 15% less than the 47,252 level in 2017.

The country functioned pretty well a little over two decades ago. Indeed, on some measures – most notably educational outcomes as measured by the international league tables – New Zealand in the year 2000 outperformed New Zealand today. One wonders how the 599 officials in the Ministry of Education at that time managed to outperform the Ministry’s 4,311 staff today.

For a Finance Minister committed to fiscal reform, there is little need to look beyond the Wellington bureaucracy to work out where to start.

To read the article on the NZ Herald website, click here.