Brian Easton concludes the proposal to reduce the number of public servants is not well worked out, and if the Government is reelected, some 'brutal measures' then

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

Announcing the reduction of 8700 jobs for public servants during the runup to the 2026 election suggests the economy is in a fragile state. The Iran War is generating global stagnation and inflation; even worse – if oil and related products are in short supply. The expected New Zealand economic upswing has been delayed – the budget forecasts assume by about a year. (See here and here and here for my earlier discussions.)

That meant the government’s aim to get its books in surplus by 2030 was compromised; had it done nothing, the new date may have been a year later. Muldoon famously said that the typical New Zealander would not know a deficit if he (sic) tripped over it in the street. Unfortunately bond markets, which are required to fund the deficit, do. They are uneasy, as reflected by the assessments of credit rating agencies (CRAs). Two CRAs have visited New Zealand this year and (slightly) downgraded their credit ratings. The third, Standard and Poors, is due about August, near enough to the election to have some political impact, since a downgrade would put further upward pressure on the interest rates that the government, business and households pay.

It is unlikely the CRAs really care about the exact target date. What they cared about was that the government had set a target but did not seem able to attain it, especially as it meant that the government’s current spending had been exceeding its current revenue so it (do I mean ‘we’?) had been borrowing to fund consumption.

So the government has to cut $2.4 bln off government spending over the next three years, which amounts to 8700 public servants in addition to the squeezes (cuts) in welfare spending. Treasury now projects that the government will be in surplus in 2029, a year earlier rather than a year later. The announced cuts will help remove the threat of a credit downgrade and higher interest rates (as well as avoiding an embarrassment in the runup to the election).

The government’s hands are not entirely clean. I was surprised by a State Services Commission tabulation of the numbers in the state services – a narrower category than the state sector excluding, for instance, education providers, Health New Zealand, the New Zealand Defence Force and the Police. In this narrower group of agencies employment increased by 120 between June 2024 and December 2025. * Perhaps there were reductions in its first six months but even the small increase does not suggest the Luxon-Willis Government has had its hand firmly on the tiller of expenditure restraint (welfare spending aside).

(When I looked at the agency breakdown, I found that employment increases were generally in areas of social control and the decreases were in those of provision of public services, a pattern you might well expect from a government of the right.)

In order to address what amounts to the unsustainable behaviour of dissaving, the government has to increase current revenue (i.e. taxes and user charges) or reduce current spending. It has chosen the latter. Hence the $2.4 bln and 8700 public service cuts amounting ultimately to 12 percent fewer public servants in the identified agencies three years out; if the same level of public service is to be maintained, that is a 14 percent increase in labour productivity.

As far as can be judged, there is no plan about how the cuts will work. The target is based on an externally determined need rather than careful practical assessment. The government mumbled about ‘artificial intelligence,’ which may, if some proponents are right, lead to productivity increases but I have seen no study which would suggest that it is possible to get a 14 percent increase in productivity across such a diverse range of activities in three years.

The 14 percent is misleading; the figure is practically higher, because the government has exempted those areas which interface with the public, focusing on the backroom employees. There is no definition of what ‘backroom’ means and so no statistics. Certainly, the notion needs to be used with caution. One is tempted to distinguish sworn officers in the police on the front line from unsworn employees in the backrooms. We know that with fewer of the unsworn, the sworn are forced to spend more time administering in the backrooms.

To add to the confusion, the government is going to merge a wide number of public agencies and centralise some backroom activities. With the possible exception of politicians, everyone knows that such redisorganisations reduce productivity for a period of three and more years. It is as if the government’s right hand does not know what its left hand is doing. (Oops, Brian, mixed metaphor – you are assuming this government has a left hand.)

Typically, these bigger organisations have more layers of management – I bet there will not be a proportional reduction in generic managers – and the top is even more isolated from the front line. There have been claims there will be reductions in HR (human relations) employees, but their numbers should diminish anyway given the lower public sector employment, but whether in proportion to the reduction in employees, who knows? In any case they will have increasingly to deal with the job reductions plus the redisorganisation. There will be an increase in badly supervised consultancies.

I regret to say that to this independent observer, the proposed reduction seems to be a panic measure. I shall not be surprised if it all turns to custard when the new government arrives after the election. (It may still be a Luxon-Willis Government.) Another source of custard is if the Treasury assumption of the strait of Hormuz opening up soon and smoothly proves optimistic.

So what happens after the election? There are no simple answers. My guess is that the Treasury advice in the October PREFU (pre-election forecast and update) will be salutary. I am less confident that the Public Service Commission’s post-election briefing will be as thoughtful. Expect some brutal measures after the election.

^{Endnote: A major gap in the public sector cuts discussion is that it focuses on inputs (jobs) rather than output of provided services. Without the promised major productivity increases the public and politicians will get poorer quality services; some may have to close altogether. While the politicians may get what they deserve, we shall be the worse for it.}

^{* There does not seem to be a December 2023 figure when the Luxon-Willis Government took over.}

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.