Public service hit with sweeping austerity cuts
Finance Minister Katy Gallagher’s department has ordered federal departments and agencies to outline sweeping spending cuts worth up to 5 per cent of annual budgets, in a move intended to rein in ballooning public service costs.
The Finance Department has written to cabinet ministers and public service bosses asking them to detail how they will meet the cost savings target, according to sources familiar with discussions but not authorised to speak publicly.
Finance Minister Katy Gallagher. Dominic Lorrimer
The savings are in addition to the standard 1 per cent annual efficiency dividend, which is a mandatory budget reduction for operating expenses of government departments.
The post-election austerity drive across the public service comes as Treasurer Jim Chalmers and Gallagher prepare to deliver a mid-year budget update in December, with deficits projected for the next decade.
The savings are not expected to be finalised for the mid-year budget, but are expected to be outlined in the May budget, sources said.
Federal departments and agencies include bodies such as Treasury, the departments of agriculture, health, education, foreign affairs and trade and the Australian Taxation Office.
Across the public service, departments are in the midst of laying off non-permanent contractors to reduce their costs, public servants said.
Departments are also reducing their head counts through natural attrition and freezes on hiring for non-essential roles.
For example, Treasury plans to cut 250 jobs over two years, a 15 per cent head count reduction from its average staffing level of 1600 in 2024-25.
The CSIRO announced last week it would shed up to 350 positions, in addition to more than 800 roles it has cut over the past two years.
Officials said voluntary redundancies for permanent public servants appeared to be inevitable to meet cost-saving targets, sources said.
At the May federal election, Labor pledged to find $6.4 billion of savings in the public service across four years, with the bulk of the savings in the final year of the forward estimates.
However, the savings goal of up to 5 per cent that departments have been ordered to fulfil is for a single year.
The revelations come after The Australian Financial Review in January reported that Labor had not budgeted for as much as $7.4 billion in increased public service wage costs caused by a hiring boom and a big pay deal for about 185,000 workers.
Public sector wages data published by the Australian Bureau of Statistics this month showed spending on federal public sector wages was $40.9 billion last financial year, an increase of 9.5 per cent, on top of a 10 per cent rise in 2023-24.
The Albanese government faces billions of dollars in public sector funding “cliffs”, which bureaucrats warn threaten service delivery, key government initiatives and thousands of jobs.
Key government departments including Health, Climate and Energy, Social Services and Attorney-General’s sounded the alarm in their incoming briefs to ministers, warning of budget cuts as large as 50 per cent in coming years and asking where they should plan to cut workers.
The worst of the looming budget shortfalls take effect from 2026-27, when funding expires for at least 100 programs, and likely dozens more.
Even before the latest savings directive, departments were scrambling to cut spending as thousands of new hires, above-inflation pay rises and a surge in workers’ compensation expenses caused blowouts in public service budgets last year worth more than $1 billion.
In its analysis of Labor’s election costings, the independent Parliamentary Budget Office assumed that the public service would have to shed 22,500 staff to meet Labor’s $30 billion wages forecast.
Asked about the planned spending cuts across the public service, a spokesman for Gallagher said the Albanese government was continuing to find responsible savings while delivering the services Australians expected.
“We delivered almost $100 billion in savings and reprioritisations in our first term, including $5.3 billion in savings from non-wage expenses like contractors, consultants, and labour hire – and have committed to a further $6.4 billion in savings over the next four years,” the person said.
“Departments and agencies are responsible for managing their allocated resources and finding savings and reprioritisations to assist with budget repair.”
Canberra-based former Department of Finance deputy secretary Stephen Bartos said the public service was finding it challenging to meet budget targets.
“Anecdotally, a number of agencies are feeling pressure on departmental expenses and finding it hard to make ends meet,” said Bartos.
Labor’s under-the-radar efforts to rein in bureaucracy costs come after it criticised former opposition leader Peter Dutton during the election campaign for vowing to slash 41,000 public service jobs in Canberra.
The total public service workforce has grown by about 38,200 since 2021 to 193,500, according to the Australian Public Service Commission.
Across the public service, the head count jump has been partly offset by reducing reliance on contractors and consultants, which grew rapidly under the former Coalition government.
John Kehoe is economics editor at Parliament House, Canberra. He writes on economics, politics and business. John was Washington correspondent covering Donald Trump’s first election. He joined the Financial Review in 2008 from Treasury. Connect with John on Twitter. Email John at jkehoe@afr.com
Ronald Mizen is the Financial Review’s political correspondent, reporting from the press gallery at Parliament House, Canberra. Connect with Ronald on Twitter. Email Ronald at ronald.mizen@afr.com
