National’s pledge to slash government spending on contractors and consultants has revived a perennial election-year issue. Are such outsiders a 'necessary evil' or a waste of taxpayer money, and what are the alternatives?
With Christopher Luxon looking to regain momentum after a difficult start to 2023, it was little surprise the National Party leader chose a familiar target.
Luxon’s State of the Nation speech on Sunday included the unveiling of a policy to create a new childcare tax rebate, funded through a crackdown on the use of outside consultants and contractors by government agencies.
In 2018, Chris Hipkins - then Jacinda Ardern’s public service minister - had pledged to cut back on spending in the area as part of efforts to strengthen the public service.
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But though expenditure did start to level off, public sector spending on contractors and consultants ballooned to $1.24 billion in 2021/22 - an increase of a third on the year before.
Promises by opposition MPs to clamp down on such spending - and a subsequent failure to make that a reality in government - are far from unusual.
In the third and final term of Helen Clark’s Labour government, the National opposition regularly took aim at spending on consultants and contractors as part of its wider criticism of bloat in the public service.
"It's not good value for money, and it also is very demoralising for people working in a service where they are not valued enough as direct employees, but all of a sudden they are valued as contractors." – Kerry Davies, PSA
Yet spending on consultants and contractors almost doubled during the National government’s nine years in power, rising from $278 million in 2009 to $550m in 2017 according to figures compiled by Labour after it took office.
Actual spending may have been higher; it wasn’t until November 2018 that public sector agencies began consistently measuring their use of contractors and consultants, with the Ministry of Business, Innovation and Employment previously found to have understated its outlay in one year by nearly half the real figure.
Massey University senior lecturer Dr Andrew Cardow, who specialises in public management history, told Newsroom the relationship between government and consultants appeared to be growing closer, citing the decision of several large firms to move into offices much closer to Parliament.
“One way of looking at it is, does this work need to be done? If it does, then why can’t it be done by the public sector?” – Dr Andrew Cardow, Massey University
Cardow said claims that private firms brought a more objective eye to policy issues did not stand up to scrutiny, given much of their revenue came from securing state contracts, while an overreliance on the private sector resulted in a weak government.
“One way of looking at it is, does this work need to be done? If it does, then why can’t it be done by the public sector?”
Public Service Association national secretary Kerry Davies told Newsroom the union did not believe contractors should be off-limits altogether, but had concerns about their overuse.
"We understand there will be times when there's intense peaks in work or very quick deadlines, but by and large there shouldn't be a reliance on consultants to be picking up core public service work."
Davies said excessive use of contractors and consultants diminished the institutional knowledge held within the public service – an important part of ensuring good governance – and was also much more expensive than simply recruiting and retaining skilled staff.
For example, psychologists working for the Department of Corrections had left the agency because of poor pay rates, only to return as contractors making up to four times their previous hourly rate as an employee.
"It's not good value for money, and it also is very demoralising for people working in a service where they are not valued enough as direct employees, but all of a sudden they are valued as contractors."
"If you're delivering a tunnelling project somewhere, the idea that you're going to keep that expertise on hand in government all the time, it's just not very cost-effective ... You're kind of damned if you do, damned if you don't." – Craig Renney, CTU
However, Council of Trade Unions policy director and former Labour political adviser Craig Renney told Newsroom consultants were a necessary evil for the public sector, particularly in specialist areas where it did not make sense to employ full-time staff.
“If you're delivering a tunnelling project somewhere, the idea that you're going to keep that expertise on hand in government all the time, it's just not very cost-effective.”
A large amount of the contractor spending in recent years had also been as a result of the Covid-19 pandemic, Renney said, with the use of contractors arguably preferable to having such capacity for unforeseen events permanently in place.
“You'd have a huge level of deadweight cost, to use the professional term … then the opposition would say, ‘You're hiring a lot of people not to do anything’. You're kind of damned if you do, damned if you don't.”
While National’s contractor and consultant policy was largely silent on its plan for the public service itself, those spoken to by Newsroom agreed there needed to be a more substantive discussion about how it should operate.
Davies said the previous National government’s decision to place a cap on core public servant numbers had contributed to a “running down” of the sector, with agencies then choosing to look outside because of the lack of internal capacity.
The Labour government’s imposition of a “wage restraint” policy for the public sector, created in 2020 to help respond to the costs associated with the Covid-19 pandemic, had likely also contributed to the rise in use of contractors and consultants, Cardow said.
“There's only so far you can say to a public servant, ‘Hey, we're not going to pay you more this year and we're not going to pay you more next year either’. Then you go, ‘Well, I could leave, no one would be doing the job, your job needs doing then I'll offer my services back to you on a consultancy basis’.”
On Monday Prime Minister Chris Hipkins dismissed the idea the wage restraint policy had played a role in the current situation, noting there were exemptions in place to cover recruitment and retention issues. Public Service Commissioner Peter Hughes appears similarly unconvinced about any side-effect of the wage restraint policy, saying talks between his officials and government agencies had found "no significant evidence" of such a trend.
But Davies said the PSA was in conversations with the Government about lifting the policy – already overdue for a review – in light of cost of living concerns and the need to provide appropriate remuneration for difficult jobs.
For his part, Renney noted the need to come to a broad agreement about a long-term plan for the public sector, and what role governments wanted it to play both in a normal environment and when unexpected issues struck the country.
“Whether or not the balance is right, people can argue backwards and forwards, but what we should be doing is asking ourselves the question, what does a good public service for New Zealand look like?”
