Improving the quality of spending

Government agencies will be looking harder than ever before at how they can demonstrate they are providing value for money.

Simple in concept, it can be hard to quantify the ‘return on investment’ on the types of functions and services that government agencies provide or fund. But that is not a reason not to try.

Start by being clear on the why, the intended and actual results, what evidence exists on effectiveness and efficiency, and what the key gaps in knowledge are. This can be the basis for filling the information gaps, tracking relevant cost and outcome measures, and economic evaluations.

A new normal

The new coalition government’s priorities include improving the quality of government spending and reducing core Crown spending as a share of the total economy.

Over $1b worth of immediate savings are sought from reduced spending on back-office bureaucracy (~$600m) and contractors (~$400m), plus a further $500m+ from stopping various programmes.

Further cuts can be expected as the government seeks to return to surplus. It will also reprioritise spending to initiatives that are proven or expected to have greater impacts.

The same demand for value for money will apply to new services and regulations – the coalition agreement’s Ongoing Decision-Making Principles state that government decisions should be based on evidence and rigorous cost-benefit analysis.

This discipline is also embedded in the revival of the social investment approach: decisions driven by data and evidence, effective commissioning with a focus on outcomes, a whole-of-life return-on-investment standard, and evaluation.

Where to start

The requirement for agencies to advise on the costs and benefits of government proposals is nothing new:

Cabinets of various stripes have set out requirements for regulatory impact analysis in the past.
Government agencies employ, or commission, economists to undertake economic modelling and cost-benefit analyses of proposals for new services or regulations (and, less frequently, evaluations of existing services).

What may be “new” is the heightened expectation that agencies can articulate whether their existing stock of functions and services is delivering value for money.

The $1b savings target is an immediate test. Agencies will need to quickly identify the lowest value-for-money activities to stop. Not all agencies will be set up right now to do so at speed or with the rigour expected of them by Ministers.

Based on our experience in advising local and central government agencies on value for money, a rapid but useful analysis is feasible even considering time and consequent information constraints.

Key points to cover in a rapid assessment

Strategic fit	Do the activities promote stated priorities or legislated objectives, or mitigate key risks? Do they address a clear market or regulatory failure? If not, their time may have come.
Cost	How many resources are dedicated to each activity and are the quantities and costs ‘right-sized’, for example, compared to local or international benchmarks?
Efficiency	Is the agency getting the most outputs from the inputs, or is there excess capacity or an opportunity for a different mix of outputs that would better meet clients’ needs or preferences?
Effectiveness	Are the activities and services resulting in the desired outcomes; what does the available research evidence say about likely effectiveness and cost-effectiveness?
Ongoing value	What processes does the agency have in place to learn about the impact of its activities, or to do things better over time in light of new information and changing technologies and preferences?

Building momentum

A qualitative analysis of the dimensions set out above is a good jumping-off point, including to:

identify how to fill gaps in knowledge to better answer value for money questions in future
use as a prompt to consider if things could be done or structured differently, or are best left to or done with others, to get better results for clients and taxpayers, or should simply be stopped.

Ultimately, however, agencies will have to go further, drawing on data and evidence to evaluate impact and whether the return on investment justifies keeping, expanding or stopping spending.

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