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Address to the Public Service Tripartite Forum

Hon. Michael Cullen
28 August 2003
Speech Notes

Address to the Public Service Tripartite Forum.

My main purpose in being here this afternoon is to listen to your discussion and to get some insights and ideas about how we align Budget processes with public service departmental resourcing, and in particular with regard to financing the results of collective bargaining. I don’t intend to either lay down the law or to table a radical solution to the problems that you have identified.

I will start with a formal presentation of the logic behind the current Budgeting mechanisms. In theory at least, departments have baseline funding allocations and need to manage their costs to operate within the baselines. If the funds are inadequate, they can lodge bids for extra money to maintain operational capability.

There is a possibility that the case for enhancing capability can be preceded by an output price review, but in practice this is a slow and risky option and isn’t really used any more. Departments cut out the middleman and go straight to the source; or at least through their Ministers.

Capability might be under threat for a number of reasons, but for the purposes of our discussion this afternoon it is a euphemism for a wage increase.

In this public financing model, increasing productivity by computerisation, e-business and so on can free up the funds needed to meet inflation and market pressures to increase wages over time. In practice, it would be an incredibly rare coincidence if productivity gains that can be won from technological progress and an improvement in departmental organisation matched the money needed to meet the labour market.

We would normally expect that some departments would be able to generate more than the amounts needed to meet the going rate, and others less. Partly this is a result of the extent to which outputs are labour intensive, and partly it is a result of what the labour market is doing in relation to the pay rates for particular skills and occupations. With fixed baselines, there will be unders and overs.

In a theoretical world, money would transfer by shrinking the baselines of the high productivity sections of the public sector and expanding those where there are no more efficiencies to be had. In practice that doesn’t happen, not only because we have no real way of measuring potential productivity gain, but also because it would be sending the wrong signal: penalising efficiency gain.

As time goes on, technological progress would normally be expected to exceed the rate of inflation: in other words gradually rising real wages are not inconsistent with stable baselines. In a labour intensive sector like the public service that is less likely.

What is more likely is that there will be technology waves: like word processing, that have productivity impacts. As time goes on, these impact efficiencies will be used up, so as time passes and baselines remain frozen, the most likely scenario is that there will be more departments on the unders side of the equation than there will be on the overs.

This was becoming apparent even before the change of government in 1999, and I was conscious that the baselines of departments – especially when projected out three or four years - were not always realistic. Early in my term as Minister of Finance I asked Treasury to look at ways of constructing realistic baselines. It has been an elusive target. Let me explain why.

The first challenge in setting so-called realistic baselines is the unit to select for projected cost increases. In theory that is nominal wage increase minus achievable productivity gain. We can not be confident about calculating either element in that equation so we use a proxy: inflation.

Inflation is itself not a good indicator because it doesn’t take account of the inherent potential for productivity gains and it doesn’t deal with the differences that different government agencies face on either cost pressure or productivity potential. It doesn’t change the basic problem of unders and overs. It merely relocates the price path around which anomalies and inequities emerge, although in reality there would now be more overs than unders in inflation adjusted baselines.

Indexed baselines would, though, take a lot of the pressure off departments to continuously seek out efficiencies, so it relieves one pressure by creating another.

There is also the problem that if we did index baselines, expectations quickly reset to zero. The new baseline is taken as a given and worked into costs, not as reflecting more headroom within which to reconfigure capability. If a strong driver of the going rate in the labour market is internal public sector relativities – which I suspect it is for many occupational groups – the indexed baseline doesn’t really solve the capability problem.

The solution that we have worked with – for better or for worse – is not to change individual baselines but to make an allowance for a generic increase in costs. This operating allowance of $1,200 million a year cumulative should give us the headroom within which to make specific adjustments to relieve cost pressures and maintain departmental capability.

The problem with it is that unless we make specific adjustments in a particular budget cycle, all new spending comes out of that envelope. The effect is that when all is said and done, wage demands stand in the queue alongside other claims for new money like health services, student fees and so on.

It is inevitable within this process that there will be lags. Departments negotiate with unions on issues like the wages needed to recruit and retain suitably qualified and motivated staff, but cannot be sure that they will get any money needed to pay for this until the fate of any associated budget bid is known. The other way around is to seek the funds to restore or build capability and then go to the bargaining table. Either way there is a lag.

Recent changes have eased, but not eliminated the problem. All departments have to produce Statements of Intent, and the new bargaining parameters require the issue of capability to be addressed in the SOIs. They also make it clear that planning for the funding of settlements should involve finance and planning staff in the departments, and not just the HR people. If capability problems that cannot be managed out of baselines are identified, there is a requirement to liaise with the SSC and Treasury four to six months ahead of the budget bid.

This still does not get around the dilemma: bargaining is decentralised but funding is centralised. The people doing the bargaining are not the people who are allocating the wherewithal to pay for the results of the bargain, unless the money is coming out of baselines. The end result is that we either have bargaining with some certainty within a confined space, or bargaining conditionally in a larger space.

I am still not convinced that there is an easy way out. If I was to create a separate pot of money as a contingency to meet wage pressures needed to maintain departmental capability, I would be killed in the rush to get some of it before it was all gone. The contingency would incentivise and reward bad behaviour. In an ideal world there would be some mechanism to rank and order priorities, but that is asking an awful lot in an era of what is in effect contestable and hence competitive unionism!

We are also dealing at the micro level at a time when there is quite a lot of pressure emerging for the government to respond to workplace issues at the macro level. Revitalising state sector superannuation and promoting employment equity are two macro level public sector employment issues that are also seeking some easing of the purse strings. They are quite apart from any initiatives that might be taken further down the track on issues like low pay, extended leave or access to training.

If I could end these introductory comments on a positive note, I have to say that this government has shown a willingness to respond by reconstructing departmental baseline funding when funding lines have not been sufficient to keep up with the needs and realities of the labour market. I am not going to draw up a long list, but we have put a lot more money into health and education, a lot of which went into worker pay packets as opposed to increased service levels. We have put more money into Inland Revenue, into social worker pay, into the Courts, and so the list goes on. The government is not an anti-worker or anti-public servant government by inclination, word or deed.

I would now invite you to step into my shoes and make suggestions for how we might align good faith bargaining with good fiscal management.


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