Organisational productivity

Productivity in the APS

One of the major difficulties associated with assessing productivity increases in the APS is that there is no agreed methodology of how productivity in the APS should be measured. The main reason for this is that the APS operates overwhelmingly in a non-market sector and this means that there are difficulties in measuring the value of outputs.

In broad terms, the current funding arrangements provide agencies with indexation supplementation to existing funding, and additional funding for new policy. Supplementation requires agencies to find substantial cost savings every year in order to fund wage increases and the efficiency dividend.

The wage cost indexes applied to departmental funding require that agencies achieve productivity gains to finance increases in wage costs above a certain minimum. This approach has resulted in funding for increases in wage costs of around 2% per annum over the last 10 years. Given that average wage increases have averaged around 3.75% per annum over recent years, agencies have needed to find cost savings of around 1.75% per annum to help meet wage increases.¹
Cost savings have also been appropriated by governments by means of the efficiency dividend since 1987–88 (previously 1% of operating costs, rising to 1.25% in 2005–06).

Such cost savings are one way in which agencies can demonstrate productivity gains, as long as the savings have not been made by reducing the quality or quantity of outputs produced by the agency. To the extent that the quality and/or quantity of outputs increase over and above levels explicitly funded by the government then productivity in agencies could be even higher than the level of cost savings required to be realised each year.

Over the last decade average labour productivity has increased by 1.8% per annum in the Australian economy generally and by 2.2% per annum in the market sector.² A direct comparison between the level of cost savings in the APS and labour productivity growth in the rest of the Australian economy is not possible because of difficulties in measuring the quality and quantity of inputs and outputs. It is also difficult to take into account the effect of funding injections for new policy and service initiatives on APS agencies’ ability to find cost savings necessary to fund the efficiency dividend and wage cost increases.

Nevertheless, the total cost savings that are required to be made each year by every agency in the APS are substantial, and compare very favourably with annual labour productivity growth in the economy more broadly.

1 The measure of APS wage increases used is the average annual wage increases from 1999–00 to 2005–06 (the latest data available) in collective agency agreements as measured from the nominal expiry date of the previous agreement to the nominal expiry date of the current agreement.

2 Average calculated using data from ABS 2007, Australian System of National Accounts, 2006–07, Cat. No. 5204.0, ABS, Canberra.