Budget rules erode Australian government’s capacity to embrace technology

| March 9, 2021

An evergreen question posed by ministers and commentators in Australia is why we haven’t seen government operations and service delivery shift to a more agile, cloud-based system.

Late last year, Matt Yannopolous, head of the budget group in the Department of Finance, set out the mechanisms that allow agencies to move to cheaper, more agile ways of developing and deploying services, especially using the cloud.

But decisions about technology systems, about the movement of funds between years to accommodate needs or technological change, and about the conversion between capital funding and operating funding to enable flexibility are neither clear nor easy.

Every instance of material spending on information and technology projects is subjected to a range of checks and balances. Yet the nature of these processes and the effort required to complete them make it difficult to meet government, community and industry expectations of a modern, agile public service.

There is the ICT investment ‘two-pass’ process: each project spending over $10 million in total has to have its activities, costs, assumptions and anticipated benefits agreed by government twice. The first is a rough estimate; the second is much more exacting. The process typically takes around 18 months—potentially two to three generations of technology—assuming cabinet agreement.

Once approved, projects are subject to a series of gateway reviews, intermittent assessments of progress on project delivery and realisation of cabinet-agreed benefits. They are aimed at managing risk, can be formulaic and may impede adaptation to new ideas and technologies as they emerge.

And then there’s the broader fiscal context. Within the budget process are policies and practices that constrain agencies. Most are good financial management—correctly allocating and accounting for capital and operating expenditure, for example, in accordance with government decisions and accounting standards.

But there are also practices and policies within the budget process that create perverse incentives. Bear with me: it’s complicated.

Let’s start with the ‘efficiency dividend’ (ED). The ED is applied each Budget, meaning that, with some exceptions, the government reduces each agency’s operating expenditure (OPEX) by 1.5% each year, often portrayed as ‘savings’. That percentage can vary, depending on government decisions about the clawback needed to support budget outcomes, but typically it’s around 1% to 1.5%, though it has reached 2.5% on occasion, as a ‘one-off’.  In the 2019 Mid-Year Economic Forecast and Outlook (MYEFO), the ED was extended to include capital budgets, unless explicitly excluded.

Then there’s the ‘offset rule’. Funding for any new idea—called a ‘new policy proposal’—has to be offset by savings within the portfolio. That means the portfolio department often has to scrounge within its own budget or the budgets of agencies in its portfolio to find enough money to fund the new idea. The government rarely agrees to cease an activity—governments don’t like disappointing stakeholders—and so departments work to deliver projects and services on ever thinning lines of funding and capability.

Between inflationary pressures, new policies, offsets and the constant stress of the ED, there’s little flexibility in OPEX. Bear in mind that cloud computing services—and associated business changes—are funded through OPEX, not capital expenditure.

So, what is capital funding for? CAPEX is the money spent on assets such as buildings (including fit-outs but not rent), military equipment, plant and ICT infrastructure. CAPEX is handled differently to OPEX, as set out in accounting standards. Capital equipment may be depreciated and contributes to the asset side of the ledger. The idea is that organisations will put aside cash to the value of depreciation so that they can replace assets once they are fully depreciated.

The federal government is different. In 2010–11, under ‘Operation Sunlight’, it changed its rules, eliminating depreciation funding and replacing it with departmental capital budgets (DCBs). Then, in the 2011 MYEFO, DCBs were slashed by 20%. Most agencies kept some capital funding for small works—projects under $10 million—needed to manage ongoing operations.

That capital funding is now further eroded by the imposition of the ED. If a large capital asset, or a multiplicity of smaller systems, need replacing, then rather than relying on its own resources, an agency has to seek funding as a new policy proposal through the budget process.

But seeking support funding through the budget process is problematic. Pursuing a new policy proposal requires a persuasive argument, considerable grit—the process can be brutal and getting through two passes can take 18 months, if not longer—and, importantly, political backing.

There are always more proposals than available funding. Successful proposals funded in each Budget—known as ‘measures’—typically account for only around 1% of the government’s annual expenditure. Crises—pandemics, cyberattacks, bushfires—can elicit some extra funding. Technology renewal will be well down the list of attractive proposals.

Also, funding for new proposals has to be drawn from somewhere. The outcome of the offset rule, meant to help manage the Budget, is prioritisation through cannibalisation. The overall effect is to dilute capability, reduce resilience and increase technological vulnerability. That reinforces the common and simplistic view of government ICT as a motley collection of ill-disciplined cost centres, rather than an enabler intrinsic to government business.

While it may seem that all the incentives exist to shift government systems to the cloud, it’s often the reverse. Cuts to the DCB and the imposition of the ED on OPEX and CAPEX make it hard to fund small, more manageable, less risky transitions and associated change management. Swapping from CAPEX to OPEX is also much less attractive, even allowing for the arduous process of writing to ministers, when the ‘savings’ may be conscripted for other purposes and returns are uncertain.

Such fiscal and operational pressures make agencies susceptible to bids by major service and technology providers for outsourcing, relieving government of the burden of technology.

That, however, has undesirable consequences. It further erodes an already diminished capability within agencies to understand and make sound decisions about technology. It decreases transparency and accountability around technologies that directly affect people’s lives. It increases the prospect of capture by and dependency on the technology and values of others, diminishing sovereignty. And it erodes national assets and the balance sheet.

The risk confronting the government is less about a reluctance to move to the cloud. Rather, it is Michael Lewis’s fifth risk: ‘The risk a society runs when it falls into the habit of responding to long-term risks with short-term solutions.’

Digital technology is intrinsic to government operations and service delivery and the government’s interactions with citizens. The government has to learn to be a smart and savvy manager of technology in a world of accelerating technological competition while overcoming its own fragility and emaciation.

Until the government’s incentives and processes are aligned with that intent, it will remain a technology laggard, and economic wellbeing, public needs and national security will suffer.

This article was published by The Strategist.