There has been a pronounced ramping-up of the public service in Australia under current (and a recent) Labor governments, even by historical standards. That this has coincided with weak productivity nationally cannot be dismissed as correlation without causation. In fact, what is happening to the public service is playing a more central role in this country’s productivity malaise than generally thought.
The ABS reported a couple of weeks ago that the number of public servants had reached 2.6 million Australia wide. It rose last financial year by 3.6 per cent and by 9.4 per cent in terms of the wage bill — outstripping the private sector in both respects. Indeed, if we widened the definition of ‘public sector jobs’ to include all those funded by the taxpayer, whether or not located within government, we are looking at around 40 per cent of Australia’s workforce. Moreover the trend has been upward, with nearly 80 per cent of the jobs created in Australia over the past few years being publicly funded. As highlighted (ineptly) by the Opposition during the recent election, the Australian Public Service alone increased by some 40,000 (or one-tenth) during Albanese’s first term, with average salaries up 8-9 per cent.
Meanwhile, the story on productivity keeps getting worse. The RBA has just announced that it is basing its key projections for the economy on labour productivity growing at a mere 0.7 per cent annually, down from the 1 per cent it had been assuming a few months back. The Treasury reduced its own estimates in the latest IGR from an unrealistic 1.5 per cent to a still optimistic 1.2 per cent. It’s not so long since productivity was growing twice as fast.
Australia’s productivity slump — one hestitates to use the word ‘unprecedented’ — translates to an economy that, as the RBA has observed, is more vulnerable to inflationary pressures, public deficits and debt. More importantly, it is an economy in which real per capita incomes and living standards barely rise. For many they have been falling.
It is a matter of arithmetic that if the public sector grows at the expense of the private sector, overall productivity will be lower. Services in areas such as health, disability and aged care — what collectively the Treasurer calls the ‘care economy’ — have inherently lower productivity and productivity growth than other activities. If anything, their performance has worsened in recent years as remits have widened and workforces have increased. (NDIS employment doubled in three years.) A recent study found that the expanding non-market sector knocked 0.3 percentage points off Australia’s productivity growth rate.
This is not really news, with the PC placing public sector growth first among several contributors to the productivity malaise. However the sector’s role is not confined to the provision of services to the public. A proportion of government employees (one-half federally) have the important role of informing/advising government decisions about policy, regulation and ‘investment’ — decisions that have an impact on other sectors’ productivity. Unfortunately this core public service role has been changing in ways that serve to compound the nation’s productivity problem. While this phenomenon is not new, it has arguably become worse more recently.
It has two inter-related dimensions. The first is the transformation from an ‘independent’ public service, to a ‘responsive’ public service, and now an ‘aligned’ and more submissive one. The Permanent Secretaries (‘mandarins’) who presided over the old public service were not always ‘responsive’ enough to their political masters, particularly when under a new government. Change was needed. But the introduction of fixed-term contracts and performance pay, along with more ‘partisan’ appointments, meant that things got too responsive. Indeed we have reached the point where the public service seems more like an extension of ministers’ offices than an institution impartially serving governments from different sides of politics.
This has resulted not only in less so-called ‘frank and fearless’ advice — I’m not sure there was ever much that was truly ‘fearless’ — but a lot more ‘second-guessing’ in the advice that is offered, with less of it written down. I recall one department head telling me at an ANZSOG event that “of course” different policy options were still being provided to ministers, just “not those that might be unwelcome”. In my experience, these are generally the ones that have most merit.
This has culminated in the ‘co-production’ with ministerial staff of a department’s written/formal advice — something that was ‘verboten’ in former times.
The shift to an increasingly reactive and submissive public service has inevitably made it harder for policy departments to retain quality people and thus to maintain capability. One respected former public servant speaks of an ‘age of incompetence’ in government administration. Evidence for that harsh assessment, unfortunately, is everywhere.
These trends became manifest first in line agencies, where political pressures have tended to be more concentrated. Among the last skittles to fall were state treasuries, leaving the federal Treasury on its own as standard bearer of the public service’s traditional role. Unfortunately, that last skittle, along with the Finance Department, appears to have fallen too. The timing is hard to pinpoint, as it did not happen overnight. The author of a history of the Treasury, with nearly 30 years service there, places its origins largely with the first Rudd Government, when Swan was Treasurer, Chalmers his ‘staffer’ and Parkinson departmental Secretary.
Regardless of its timing, that a more political Treasury is now a fait accompli has serious implications for policy into the future and thus for the future of Australia itself.
In returning to this theme for a private luncheon discussion recently, I was prompted by three news items:
The first was a report that the multi-billion dollar government program to reduce (measured) inflation through subsidised rebates on users’ energy bills, failed to obtain the formal sign-off by the Treasurer required under legislation. This omission, which raised questions about the program’s constitutionality, was ultimately rectified — but not before monies had been expended. Apart from its administrative failure, that Treasury could support such an ‘anti-economic’ scheme, in the lead up to an election, has raised questions about both competence and partisanship.
Second came Chalmers’ high-stakes backdown on the more egregious features of his proposed penalty tax regime for citizens with higher superannuation balances. That a plan to tax unrealised capital gains (paper profits) could have been persisted with by the Treasurer for two years, in the face of justifiable objections from all sides, suggests the his Department was behind him all the way (if not pushing the idea in the first place).
Thirdly, Treasury’s modelling in support of the Government’s Net Zero policies has been widely criticised for the unrealistic assumptions that its findings depend on. One of the more significant is that the big emitters globally take comparable action to us, rather than the relative inaction or retreat we observe.
In addition to such failures in its own policy domain, Treasury seems to have dropped the ball as an opponent within government of bad policies emanating from other ministries. Observing the Treasurer’s support for Bowen’s costly renewables policies and Bourke’s retrograde industrial relations changes — both of which undermine our productive potential — one wonders what role Treasury has played. It is of course possible that there are briefings against such harmful policies behind closed doors, as Treasury officials sometimes intimate. If so, this has clearly had no influence on a Treasurer who is on the record offering fulsome praise for his department.
Increasing politicisation of the Treasury could be expected to have implications for agencies located within its portfolio, especially those with an economic role. The more ‘political’ it becomes, the more it might be expected to seek to exert influence. I got an early sense of this during the latter part of my time at the Productivity Commission, when I found myself rebuffing queries about where certain sensitive inquiries were ‘heading’. Such pressures could only have increased since then. Indeed greater collaboration with Treasury can be read into the Treasurer’s ‘Statement of Expectations’ for the PC, the first of its kind. Could such efforts succeed? Hopefully not. It would not serve the interests of either party, especially the Productivity Commission, let alone those of the public. That said, proposals by the Commission to restructure corporate taxation in Australia — an area of policy that the Treasury has hitherto kept entirely to itself — will have raised doubts.
Elaboration of remarks to a business luncheon group in Melbourne, November 2025