Govt blames public servant cap for blowout in consultant costs to $550m a year

Friday, 22 June 2018

The cap on the number of public servants is to be lifted, with the Government blaming it for a surge in contractor spending costing taxpayers hundreds of millions of dollars a year.

Currently the State Services Commission limits the number of 'core' public servants to just under 36,500, with a largest proportion based in Wellington, staffing a variety of departments and ministries.

On Friday State Services Minister Chris Hipkins announced that the cap would be ditched, saying that while it had created a focus on efficiency, it also led to 'perverse' incentives.

Central to this is the sharp increase in spending on consultants and contractors, as departments battle to limit permanent staff numbers while coping with increased demands.

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According to figures compiled by the Government, consultant and contractor costs almost doubled from $278 million in 2009 to $550m in 2017.

Other figures presented in Cabinet papers show that since 2006, wage and salary costs in the public sector have risen by 49 per cent, while contractor spending has climbed 134 per cent.

'The cap was introduced at the height of the global financial crisis but it created perverse incentives and in the following years its arbitrary nature forced the previous Government to find creative ways to get around it,' Hipkins said.

Although the move is likely to see the number of permanent public servants increase, Cabinet papers released with the announcement claim it will have no financial implications for the Government, with savings on lower consultants being spent on new employees.

Beyond increased contractor spending, Hipkins said the cap had other negative consequences, from reducing the number of university graduates being taken on and harming retention of those graduates, to harming institutional memory within departments.

Government departments were also more reluctant to transform the services they provide. 

'Large scale transformational change often requires a significant initial investment in staff,' Hipkins told Cabinet. 

Public sector will grow - National

National's state service spokesman Dr Nick Smith said removing the cap came with risks.

'The risk with the Government removing the cap is it will see a return to what occurred under the last Labour Government, of a 50 per cent increase in the size of the public sector, for no real gains in public services,' Smith said.

'The system is inherently biased in the state sector towards more policy advisors and administrators, rather than front line services.'

While the use contractors rose under National, Smith said 'hundreds of millions of dollars of that' related to engineering expertise associated with major earthquakes.

'It does not make any sense for Government to have that expertise inhouse and we thought then and still think that we can get better value for taxpayers by contracting that technical expertise in.'

Smith denied that the cap had been manipulated. 'I do accept that there will always be some degree of arbitrary measurement around what is considered core public service and what is considered front line public service.' 

State sector union the PSA welcomed the move, saying the cap was pointless. 

'We are delighted this relic of National's dismissive attitude towards the public service has finally been relegated to the dustbin of history,' PSA national secretary Glenn Barclay said, adding that the union had called for Labour to commit to ditching the cap.

'For some reason, the previous government could never make the link between the pointless cap on full-time staff with the massive growth in contractors and consultants.

Even the Taxpayers' Union attacked the cap, saying it was well known in Wellington that it was leading to higher spending on contractors.

'The half-billion dollar spend on contractors is the result of National's superficial approach to limiting bureaucracy. National announced an arbitrary quota and fiddled with staffing arrangements when they should have been scrapping entire departments,' Taxpayers' Union spokesman Louis Houlbrooke said.

'For years it's been no secret in Wellington that government departments throw huge money at contractors. It's the type of gravy train a centre-right government should have hammered.'

But Houlbrooke said there would be no savings for taxpayers in the move.

'Unfortunately, Minister Hipkins has confirmed the savings will instead be used to expand the public service further.'

National-led crackdown

While it may be politically popular in some circles, the cap had been manipulated for years in a bid to prevent it from being breached. 

When National swept to power in 2008, it fulfilled a manifesto promise to cap the number of 'core' public servants, especially the number involved in communications.

'The Labour Government let the bureaucracy get out of control. In nine years, the public service grew by 50 per cent,' then State Services Minister Tony Ryall said in March 2009, as he pledged to make 'more resources available for frontline services, where they matter to all New Zealanders'.

Initially capping the number at 38,859 'full time equivalents', the cap was cut to 36,475 in 2012.

Even the new Government acknowledges the cap created discipline on ministries to focus on priorities and efficiency, after a period in the Helen Clark Labour government when the size of the public service expanded considerably.

But maintaining the cap during a period when the economy and population were expanding at speed led to 'perverse' outcomes, Cabinet papers released on Friday show.

As well as leading to Government departments to game the cap as they reclassified some staff as frontline staff rather than core, even when their roles did not change.

When Worksafe New Zealand was established, several hundred staff were suddenly considered 'frontline' staff for the purposes of the public sector cap, even though their roles did not change.

In 2017, when some functions of the Ministry of Social Development were transferred to the new Oranga Tamariki, Ministry for Children, 278 jobs no longer counted towards the cap.

As far back as 2014, critics were warning that as well as creating a climate of fear, the cap appeared to be making little difference, with official reports that the number of bureaucrats in Wellington had actually increased.