ANALYSIS
Government departments have announced plans to reduce headcounts by more than 3000 staff in a bid to find $1.5 billion worth of savings each year.
The savings are comprised of cuts to certain “backroom” spending of 2 per cent, ordered by Labour before it left office last year, and 6.5 or 7.5 per cent ordered by National, as well as cuts to consultant spending.
The cuts are the big story in the public service, and in its home base, Wellington. With announcements about redundancies coming every day, it can be difficult to grasp the size of the cuts in the context of total Crown spending - and what slashing that many public sector employees will do to the economy, in particular the economy of Wellington.
Looked at in a certain way, trimming spending by that much is a pretty big deal. During the Key-English Government’s final term, new operating spending each Budget would be about $1.5b. During Labour’s first term new spending each Budget would be about double.
Cutting that amount of spending out all at once puts that into a reverse, as if an entire National budget, or half a Labour budget did not happen - a fairly significant but not enormous sum, in other words. In fact, if you look at Budgets delivered by National versus those delivered by Labour, the difference in new spending has tended to be more than $1.5b. A cut of that amount is almost like turning one Labour Budget into a National one.
Examined a different way, the cuts look like even less. The Government was forecast to spend $144b next year. The cuts would mean this figure reduces by about 1 per cent - nothing major.
But if we drill into this a bit more, the cuts begin to look more substantial.
Of that $144b, $47.5b will be spent on social welfare, mainly superannuation and other benefits. A further $29b is spent on health and $20b is spent on education. Most of this is either a transfer payment, which is untouchable - it is money that just goes from the Crown to its recipient, or it is very much “frontline”, in that it employs doctors, nurses and teachers.
The Ministries of Health and Education have announced cuts, but very little of the spending in the health and education sectors is “backroom”. That means that the policy parts are cutting quite deep. The Ministry of Education is axing 12 per cent of its total positions, and the Ministry of Health is cutting about 16 per cent.
Vote Health in Budget 2024 allocated just 1 per cent of the total “vote” (”vote” is Budget language for budget), or about $238m to the Ministry of Health, the part of the health system best described as the “backroom”.
The vast bulk of the Health budget, or 86 per cent of the total, went to running hospitals, subsidising primary care, purchasing pharmaceuticals and delivering Māori health services. A further 12 per cent of the vote went to new capital projects (building hospitals) and remediating Holidays Act payments.
That is a long way of saying that if you are looking to take $1.5b out of the back office, you are not really looking at $144b or even $100b, you are probably looking at individual ministries with budgets in the hundreds of millions or low billions of dollars.
The Ministry of Business Innovation and Employment (MBIE), perhaps the ultimate “backroom” ministry because of its enormous size, actually only has expenses of about $1.2b, and only about $835m of that comes from the Crown, with a large portion of the rest coming from charges and other revenue sources.
Other large “backroom” ministries also have comparatively small budgets. You can get a good sense of these by looking at agencies’ annual reports which usually do a good job of separating out back office functions like policy from front line work.
IRD spent about $660m on what might be called “backroom” work (taken as providing policy advice, services to Ministers, and debt management) last year, which includes about $100m for investigations, which is arguably frontline if you are talking about enforcing the tax system. MSD’s backroom works out at about $333.5m; Treasury’s is about $333.5m, and Oranga Tamariki’s about $151m.
When you start looking at those figures, you can see how difficult it could be to find $1.5 billion in backroom savings every year. Despite the well-documented instances of public service waste, most Crown spending is already directed to the front line.
Let’s look at the cuts another way: public sector growth.
The public service workforce grew an enormous amount under Labour, from 49,730 full-time equivalent staff in June 2018, about eight months into Labour’s first term to 65,699 FTEs in December 2023. In the last six months of 2023 alone, the public service workforce grew by 2582 FTEs or 4.1 per cent.
Put that way, the cuts don’t seem too severe - they’d just undo, in headcount terms, a little more than six months of workforce growth.
A lot (though not all) of the people included in the 65,599 figure would qualify as backroom (the Public Service Commission, which publishes the data, distinguishes between the public service and the broader Public Sector of about 462,000, which includes things like the 100,000 strong health workforce).
Let’s look at what jobs grew fastest under Labour.
Public Service Commission data shows a certain tendency for “back office” roles to have grown faster than frontline ones. Social, Health and Education Workers whose ranks expanded by 1952 between 2018 and 2023. The number of inspectors and regulatory officers, the most common job in the core public service, grew by 772.
Meanwhile, the number of information professionals increased by 3649 and the number of managers increased by 2329 in that time.
The public service is headquartered in Wellington, but the public sector employs people around the country. In fact, most public employees, just a few less than 140,000, are based in Auckland. The number based in Wellington is closer to 90,000.
This makes sense when you think the two largest public sector employers, health and education, employ people roughly in proportion to the populations they serve. Unsurprisingly, there are more doctors, nurses and teachers in Auckland than anywhere else.
But if we think about the core public service, which roughly equates to the “backroom” (roughly because this definition includes some front line staff like corrections officers, while excluding others, like nurses) targeted by these cuts, Wellington is still king, though not to the extent you might think.
Just 13,400 people are employed by the core public service in Auckland, compared with 28,700 in Wellington. That means about half of the public service is based in the city. Again, it is probably fair to say that the stereotypical public servant, an analyst or policy specialist at Treasury, MBIE or Ministry of Foreign Affairs and Trade, is overwhelmingly likely to be based in Wellington. The data is skewed by agencies like Corrections that need teams closer to the communities they serve, but who still qualify as the public service.
What happens when 3000 of these people, largely Wellingtonians, lose their jobs at once? We have not had cuts like that for some time. The Key-English Government opted for a sinking lid policy, reducing headcount over time. This Government is wielding the axe much more immediately.
Economic consultancy Infometrics publishes data about regional economies. Their data splits out Wellington City, where most ministries are based, and the wider Wellington Region, where many of the public servants who work there actually live.
The region’s GDP was $50.1b last year up from $44.1b in 2018. The region grew more slowly than the national economy during Labour’s first term, but much faster in Labour’s second. Over the last six years the region’s growth has averaged that of the country at large.
Infometrics chief executive and economist Brad Olsen cautions that you cannot simply subtract $1.5b from the region’s $50b economy to come up with a “worst case” estimate for the cuts’ economic impact on the city. Spending does not just equal GDP, and the cuts do not equate directly to money being sucked out of the economy, and not all the cuts will fall in Wellington.
Nevertheless, in context, a $1.5b cut equates to about 3 per cent of the region’s GDP - a figure that really can’t be sniffed at, but not something that would bring catastrophe.
“It at least gives you an idea of the magnitude. $1.5 b in the context of $50b gives you the context. It is substantial but it gives you the context that you are not carving off an entire part of the economy all at once,” Olsen said.
It’s also worth remembering the Government plans to use money saved from the spending cuts to pay for tax cuts. That means the substantial number of regional workers who are not losing their jobs will get about $1000 a year to spend in the city, offsetting some of the pain of public sector redundancies.
Olsen said there would be a considerable impact on employment in the city.
“For Wellington City that sort of workforce reduction, assuming that it is concentrated in Wellington City … would represent over a per cent of total employment being lost in the city, that is no small amount going all at once,” Olsen said.
“There are real consequences coming through here for the wider city, for others and other businesses across the Wellington economy. These cutbacks will have a more concentrated effect in Wellington than will be felt more broadly,” he said.
In Wellington City, the relatively small outcrop of land is where most of the core public service actually work. Employment in the city has grown slightly above the national average recently, and particularly in 2023, when employment growth in Wellington City grew by an impressive 3.8 per cent compared with a national average of 2.4 per cent. However, for each year Labour was in office, bar 2020 and 2023, employment growth in Wellington was actually below the national average.
The city added 6726 jobs in 2023. About two-thirds of the jobs added in the Wellington region were added in Wellington City. Since 2018, about 20,000 jobs have been added in the city. There were 185,900 filled jobs in the city in 2023, equating to most of the 322,600 jobs in the wider region.
If most of the 3000 people who lose their jobs (or whose vacancies go unfilled) came from the Wellington region, it would probably have a noticeable but not catastrophic impact on the city.
If all of the redundancies were in Wellington City, it would mean a loss of about 1.6 per cent of the workforce there.
“One additional thing for Wellington is that not only do you have a concentration of the public sector, you’ve also got a concentration of the private sector that support the public sector. So there’s almost a doubling-down effect where some consultancies cut back on workforce and won’t be able to sustain their workforce as much into the future. I think all of that will have a further dampening effect,” he said.
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
Expectations tempered around return to surplus in 2027/28.