Public Policy Challenges Facing New Zealand

23 September 2009 0 Comments

Speech to Institute of Public Administration New Zealand

Good afternoon and thank you for the opportunity to join you here today.

It's just over a year since I spoke to the Institute of Public Administration New Zealand - then as National's finance spokesman. So it's great to be back as Minister of Finance.

This is the first in the Institute's spring series "building the public sector for the 21st century", which will continue with various speakers over the next six weeks.

I welcome the series - as I'm particularly keen to open up the debate around public policy and the delivery of better, smarter public services.

I'm also keen that the debate is as informed as possible.

A lot has changed in since I spoke to IPANZ a year ago: Most significantly, the John Key-led National Government was elected last November.

John Key's aspirational leadership is just what New Zealand needs right now, after the public delivered a strong mandate for change and a desire to see New Zealand fulfil its potential.

Our economic and fiscal position has certainly changed significantly since I spoke to IPANZ last year - unfortunately, significantly for the worse at every turn.

The new Government inherited the worst global recession for 60 years, and a New Zealand economy that went into recession before just about every other developed country in early 2008.

This reinforced the need for new leadership and a fresh approach to economic management.

That's essential if we are to build a high performing economy that offers opportunity for our young people, security for New Zealand families and a business environment conducive to investment and jobs.

Let me say that I remain confident that New Zealand can come out of this recession in better shape than most other countries. Despite the recession, we have a lot going for us.

New Zealanders are a resilient bunch and they're getting on, doing what they need to for themselves and their families.

So we have seen plenty of challenges and changes in the past 12 months.

But some things haven't changed since I last spoke to IPANZ. For example, I still firmly believe that a motivated, professional public service is critical to good government and delivering effective services to the public.

That remains our position - and it's why delivering better, smarter public services is one of the Government's six economic policy drivers for the next three to five years.

In the current fiscal and economic environment, we have little choice but to do this with little or no extra money.

Let me first address the role of the public service in contributing to good government.

To my mind, good government is built on a mutual understanding of the role of the public servant and the role of the politician.

Public servants provide their best professional advice without fear or favour, and politicians make decisions consistent with their political mandate and take responsibility for those decisions.

I have been a public servant in the past and I'm now fortunate to again be working with excellent public servants as a member of the executive.

I know how much can be achieved when public servants know what's required and are allowed to get on and do it in an environment of respect and support.

I also know that little gets done if they don't know what's required and there is no respect for their role or political support when policy inevitably comes under pressure.

As I said last year, the public service will benefit from a focus on results over process; decisions over discussion; and professionalism over politics.

The change of Government has provided an opportunity to ensure that those things happen.

This National Government's thinking on the public service is guided by some key principles, which I want to share with you today.

The first is continuity.

One way to reduce process in the public sector is to rely more on judgment. Good judgment happens when experience is combined with clarity.

Both of these things are more likely if there is continuity. Continuity allows the build up of personal and institutional knowledge.

Politicians instinctively want to reorganise our public institutions.

But this Government has a high threshold for structural change. Clearly, in a few cases where the benefits exceed the cost, there will be change.

Our second public service guiding principle is independence.

There must be a line between the political role of the Government and the professional independence of the public service. Under the previous Government, it was often hard to know where that line was.

This Government is pulling back that line and drawing it more clearly.

In recent years, the public service was expected to focus too much on risk management, particularly when those risks were political risks. That's not the public service's role.

A no surprises policy is sensible and ministers should expect professional judgment about what amounts to political risks.

But the biggest political risks are unpopular or ineffective policy, and ministers - not public servants - should take responsibility when such policies fail.

Our next guiding principle is professionalism.

Public sector professionalism is important to the National Government.

The professionalism we value is the public service telling the Government what it doesn't want hear.

Ministers may well disagree with the advice they receive, but open and respectful debate is the best way to make progress.

Public servants can focus too much on nuance. But strongly-expressed disagreement isn't the end of the world.

As part of this openness, we have invited policy advisers to take part in Cabinet committee discussions when that's appropriate. We believe advisors can exercise better judgment if they understand the context in which they are making that judgment.

We have reintroduced officials committees to support Cabinet committee chairs. 

The purpose of the officials' committees is to lift the contribution of Cabinet committees in progressing the Government's agenda through improved management of the policy work programme and improved quality of Cabinet papers.

We are using the Strategy Committee and Expenditure Control Committee to encourage Ministers and CEOs to clarify their direction and underpin that direction with sound financial analysis.

The Government also expects innovation. This is fundamentally important because without innovation, we will not deliver better, smarter public services over the next five years.

The public service is full of people with better ideas than the policies of the day. So public servants' ability to innovate is more important than ever.

This Government wants to create space for public servants where innovation and the attendant risks are part and parcel of developing better policy and better services.

The Government will support innovation - even with a risk of failure. To support that, the public sector should encourage career rewards for taking risks.

New Zealanders increasingly expect the level of public sector responsiveness and innovation they see in the market economy.

I believe governments will pay an increasing political price if they fail to deliver responsive public services.

So these are the guiding principles this Government has set for the public service. I think it's important to understand them, as we deal with a number of challenges.

Let me now turn to the major public policy challenges facing New Zealand.

The first and most obvious challenge we face is the economic and fiscal environment and the legacy of the global recession.

As I said earlier, this challenge is more significant than we have seen for two or three generations.

I believe the impact of this recession will continue to be felt on the Government's books for 30 years.   

Public finance cycles are long. Net government debt rose steadily from the early 1970s and peaked at over 50 per cent of GDP in 1992. It then took another 16 years of near continuous growth to get it down and almost eliminate it by 2008.

So the last public finance cycle began in the early 1970s and lasted until 2008, when the spectre of too much borrowing was used as a political weapon.

Over the four years from 2008, our total GDP will be permanently $50 billion lower than if the global financial crisis had not occurred. That means the Government will collect about $16 billion less tax revenue.

With expenses continuing to grow regardless, we will double government debt by 2014 - borrowing another $40 billion, currently at the rate of $400 million a week.

We are doing this to maintain entitlements, invest in productive infrastructure such as roads, broadband and electricity transmission, and to keep the economy running.

Additional borrowing on that scale cannot continue indefinitely.

The Government has been concerned to strike a balance between dampening the worst of the recession and preventing escalation of public debt. 

This is critical because the increase in interest costs competes directly with and displaces spending on more worthwhile public services.

Core Crown finance costs have been fairly constant over the past decade.  But in the next four years, they will more than double to over $5 billion annually. 

That means the Government's interest costs will increase by about $2.8 billion by 2014, or roughly $700 million a year. 

So our new annual spending allowance of $1.1 billion could have been around $1.8 billion had debt not been rising. 

In all, interest costs are taking up almost 40 per cent of new spending.

It will take a lift in GDP of about 4 per cent over the next four years just for the Government to collect enough revenue to pay for the extra interest costs.

In other words, the next 4 per cent of economic growth is already mortgaged.

For these reasons, it is strongly in the community's interests that we do not get drawn into a debt trap. 

Unfortunately, this will be the fate of many Western countries as they emerge from the current crisis.  They will end up with smaller public services, lower pensions or increased taxes as a result.

So my message here is straightforward: We simply cannot afford to continue the public sector growth we have seen in recent years. We cannot escape this fact or wish away this constraint.

Government spending has ballooned by about 50 per cent in the past five years - twice the rate of revenue and twice the rate of economic growth.

This is unsustainable - no household or business could survive with its spending running at twice the rate of its income. And nor can the Government when Budget deficits exceed $10 billion and surpluses are 10 years away.

Therefore, at a time when public expectations of services from government agencies are increasing, the Government's ability to pay more for these services has disappeared.

That's why lifting the performance of the public sector while reducing the rate of spending increases, is one of the Government's six policy drivers for the next three to five years.

We made a good start in the Budget, freeing up $2 billion over the next four years to put back into Government priorities such as boosting frontline services in health, education and law and order.

And we have fulfilled an election commitment to cap the size of the bureaucracy by putting a lid on the number of back office positions. That allows us to focus on the frontline, where public demand for better, smarter services is greatest.

This is not a time for slashing and burning because the results will be disruptive and will not endure.

Our first Budget dealt with the immediate and very real challenges of the recession. The Government is now asking departments and Crown entities to think hard about how to live with little or no extra funding for those three to five years.

Budget 2010 will reflect the new spending allowance, the Government's priorities and emergency cost pressures.  

Beyond that, there will be no further bids for resources entertained in this budget round. The intention is to shift the focus from minor incremental spending to an in depth analysis of whole votes.

Ministers and departments should examine their total spending and focus on how best to meet the Government's priorities.

The Government has been impressed with the way public service leaders have come to grips with the new outlook.

Public service leaders know their own operations and they have a strong sense about what works and what doesn't.

Telling us something doesn't work is not an admission of failure.  I'm more critical of those who have not bothered to find out if it works or not.

The public and politicians need to support public service leaders here. We cannot afford to be funding programmes and activities that simply do not work or that are far too expensive for the gains they produce. 

Getting a better understanding of what we currently do and at what it costs would be a good place to start. 

All public services need to know the price, quantity and standard of their services and activities. Good decisions are informed decisions.

Departments and entities that know the financial structure of their activities will be able to make better decisions about changing them.

To me, management accounting and information looks patchy across the public service, but both will be critical.

Looking ahead, I hope there will be rigorous debate about the shape of our public services.

In the interests of debate, I want to float a few concepts that describe where public services might evolve.

The first is the "single window". We want New Zealanders to access a wide range of government services easily and reduce our costs at the same time.

By some counts there are more than 600 government (that's govt.nz) websites.

There are numerous government 0800 numbers - at least two agencies have about 20 separate toll free numbers and there are quite a few with more than five of these numbers. 

There's a direct cost to the Government from this level of duplication, with what look like quite large variations in unit costs. 

There's also a cost imposed on those who use them through having to provide the same information to multiple agencies or multiple times to the same agency.

I think there is value in exploring whether we could provide people with a single IT window into tax and income support provided by Inland Revenue and the Ministry for Social Development. At this stage, it's just an idea, but it's certainly worth exploring.

Where possible, public services should allow New Zealanders to manage their own interactions with government. That will require us to first consider the needs of the public, before the needs of the institution.

A second concept for the future is "inside out government".

Government holds a wealth of information.  Some of it - quite rightly - is sensitive and access should be strictly controlled - tax records for example. 

But in other areas, I see no reason why we can't turn government inside out, so to speak, and make the same data and information available to those outside of government. 

Government can tap wider resources in the community to analyse and use government data to help solve problems and produce insights. A ministerial committee is exploring this concept.

Inside out government also requires government to be open to good ideas from business.

We want to see ideas generated in the private sector and NGO sector genuinely considered and appraised - not simply ruled out on the basis that these sectors might not understand all aspects of government.

The last concept I want to set out is: "We know their names".

Government has a habit of endless, repetitive analysis of well-known problems.

We know the names of our service users so we can understand their needs. Then we can shape their services better.

Sweeping generalisations and motherhood and apple pie objectives don't solve problems - action does. And the same analysis can make problems look so large that they can't be solved.

In this small country, we can know each person who is the focus of our service, whether it's the young offender or the older person with chronic respiratory problems.

And we can only solve issues person by person.

Conclusion

Before I conclude, let me repeat something I said earlier: This Government believes the public service will benefit from a focus on results over process; decisions over discussion; and professionalism over politics.

In the past, too much government policy was aimed at trying to improve everything at once - a goal doomed to failure.

This led to large meetings of public servants trying to work out vague and contradictory objectives; a public service programmed to taking no risks; and a public service subject to vigorous ministerial intervention if they got it wrong.

That is not the way this Government operates.

Part of sharpening our focus is having some humility about what can be done and what can't. Another is using more useful language and less vague rhetoric.

Finally, it's about doing the things that work and stopping doing the things that don't work. It's about doing fewer things and doing them better.

While our political opponents have attempted to spread fear about the Government's stewardship of the public service, I believe ordinary New Zealanders can see through that.

Unlike our opponents, ordinary Kiwis are not stuck in an ideological time warp. They understand that times have changed and that the public sector needs to keep pace with that change.

Considered decisions now will avoid harsh decisions later.

New Zealand has been well served by a professional, independent and dedicated public service.  We have been at forefront of the provision of social welfare and public services - New Zealand was the "social laboratory". 

In the very recent past, New Zealand's public service was at the forefront of world-leading reform.

The National Government has presented an opportunity for the public service to build on its recent achievements, refresh its thinking and refocus on delivering effective services to the public.

There has never been a better opportunity for people in the public service who have the confidence and competence to step forward.

Equally, there has never been a better opportunity for experienced and committed public servants to contribute to constructive change.

Thank you.


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