Governments around the world are facing a range of unprecedented budgetary challenges, and many will be forced to implement drastic cuts. Yet most public-sector cost-reduction programs fall short of their targets, despite detailed plans and a significant amount of political will. Why is cutting costs in government so difficult?
In the private sector, decisions about where to cut costs (and where to invest) are informed by the likely impact on an enterprise’s future profitability. While judgment is part of the equation, building shareholder value is the primary goal.
In contrast, the public sector lacks an overall measure of value equivalent to profit, so administrators cannot rely on a singular focal point—a lodestar—to guide their decisions. When embarking on a cost-cutting exercise, public administrators confront all the same strategic, organizational, and management challenges faced by their commercial counterparts, with the added complication that their actions will not culminate in a commonly agreed-upon measure of success beyond a reduced level of spending.