Alan Stockdale on Finding Opportunity in Crisis

Alan Stockdale on Finding Opportunity in Crisis

          
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Alan Stockdale on Finding Opportunity in Crisis

An Interview with a Former Treasurer of Victoria

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    In This Interview
    Alan Stockdale, former treasurer, State of Victoria, Australia

    Education

    Bachelor of Laws, University of Melbourne



    Bachelor of Arts, University of Melbourne

    Career Highlights

    2008—present, federal president, Liberal Party of Australia



    1999—2008, investment banker, specialist in infrastructure projects, Macquarie Bank



    1992—1999, treasurer, State of Victoria



    1985—1999, member, Victorian legislative assembly, for Brighton



    1970—1985, various positions, workplace relations

    Outside Activities

    2002—2008, chairman, Institute of Public Affairs



    Member, various boards and consultant to several private companies

     

    In the early 1990s the State of Victoria, Australia, was drowning in a sea of debt. The new government of Liberal Premier Jeff Kennett embraced a bold and innovative plan to tackle the runaway government budget in one of the most successful cost-reduction drives in recent memory. Alan Stockdale, treasurer of Victoria under the Kennett government from 1992 through 1999 and a key architect of the strategy, spoke with The Boston Consulting Group’s Larry Kamener, global leader of the Public Sector practice, about how the Kennett government put Victoria’s financial house back in order.

    Restoring Fiscal Sanity: Strategies for Tackling Government Deficits

    How bad were things in the State of Victoria when the Kennett government came to power?

    The state’s debt had trebled in the ten years that Labour had been in office. We had an annual budget deficit of $2.5 billion that was growing rapidly. Public-sector employment had grown very dramatically, and the state’s credit rating had been downgraded. The state’s economy was flat on its back, and public confidence was at an all-time low. Victoria had lost its long-held position as the state with the highest average net income in Australia. We saw all this as a huge challenge in which the government needed not only to rebuild public finance but also to help rebuild confidence and regenerate activity in the private sector.

    What was the vision of the new government when it took office in 1992?

    Our view was that the role of state government was to actually set a tone that was probusiness—to minimize government-created impediments to business. We believed taxes should be reformed to limit their impact on business and particularly on exporters.

    And we also had the view that the core government was not delivering services efficiently. Our education system, for example, had been totally captured by the education unions. The hospitals were run for the benefit of staff rather than the benefit of patients. Nobody had ever really tried to subject all of these activities to competitive discipline, to drive efficiency in the use of resources, and to break the power of vested interests.

    There was a period before you took office when it was clear you would win the election. How did you prepare during that time frame?

    This really falls into three parts. First, most of us in the new government had been members of the shadow cabinet since 1985, and that core group had worked very closely together. So we had the core group who had a very strong vision of the role of government and a strong set of values. That was incredibly important to being able to implement policy quickly.

    Second, once it became apparent that we were highly likely to be elected, we set up implementation groups, and Premier Jeff Kennett sat at the head of those groups. We studied the experience of other countries and other jurisdictions in Australia to plan the restructuring of the public service. We also looked very extensively at the experience of countries like Britain, New Zealand, and Canada in regulation reduction. And we examined how privatization had been handled elsewhere, particularly in Britain and New Zealand.

    Finally, we set up a group that planned our legislative program for the first 12 months. And in many cases, we had draft bills prepared and ready to be introduced before we officially took office.

    Were there any big surprises despite all this preparation?

    I guess in really complex tasks such as the privatization of the electricity industry, our planning could only scratch the surface. So inevitably, we encountered things that hadn’t even been dealt with or addressed at all in our planning. And in terms of the regulation reduction, I guess the task proved bigger and more difficult than we’d ever imagined. But I think the surprising thing, in retrospect, is how much of the agenda was implemented pretty much as we’d planned it.

    You tackled two major changes at once—budget reduction and a complete overhaul of how the public sector operated. Was that overly ambitious or was there some synergy in doing both at once?

    The two sets of agendas actually worked pretty well together. I would slightly redefine the first—budget reduction. It was not only about cutting costs. At the same time, we wanted to improve service delivery. So a lot of reforms were designed to make the public sector more efficient, to focus the public sector on the services being delivered to the community, and to make the public sector more efficient in the use of resources. So the two efforts fit together quite well.

    You came into office at a time of real financial crisis for the state. How did that impact your ability to make dramatic changes?

    People were prepared to tolerate things that they were uneasy about and even tolerate a style of government that they were uneasy about, because of the sense of crisis. And of course that sense of crisis resulted in a massive election win: we had a huge majority and controlled both houses. Had we not controlled both houses, a lot of those reforms that required legislation would have been much more difficult, if not impossible, to make.

    How did you come up with the overall expenditure-reduction targets for the departments?

    A political decision was made, largely by the premier, that everybody had to feel involved. So we worked out the amount of money we could afford to spend in an upcoming budget year. We then set each department’s initial targets based on an equal sharing of the overall cost reduction needed.

    From there, of course, there was some bargaining for individual departments to bear less of the burden. The police, for example, were largely excused from the cost cutting. They had not been well funded by the previous government, and we’d actually made commitments in the run-up to the election to increase the number of police. You obviously couldn’t increase the number of police if you were applying a very substantial reduction in funding. And the cabinet also had the view that education was our most important priority. As a result, the savings target for education was reduced by nearly 50 percent, with the additional cost reductions spread across other departments.

    It was up to the individual departments to then come up with plans to meet those cost-reduction targets. The Budget and Expenditure Review Committee held hearings to vet those plans. And the onus was constantly on the departments and the line ministers to justify what they were proposing. In particular, the bottom-line question was, Can you assure us that you will meet the budget target that’s been set for this year?

    This approach used centrally set goals, but departments were given the autonomy to figure out how to meet those targets. Why did this approach make sense?

    There were two broad ways government had tackled cutting budgets. One was the centrally driven approach. David Stockman, who was Ronald Reagan’s head of the U.S. Office of Management and Budget, wrote a book that illustrated the consequences of trying to centrally drive cost reductions. That abjectly failed. He thinks he failed because of the culture of Washington. In fact, I think he failed because everybody else in the bureaucracy had both the incentive and the ability to fight the cost-cutting program. And those making the cuts were isolated from the people who had to figure out how to operate on a leaner budget.

    We chose to follow the reverse direction. We set the bottom-line target centrally and the service delivery requirements in very general terms. And we would not accept the traditional public-service ploy of coming back and proposing cuts to politically sensitive programs in order to create a public outcry over the reductions. Departments had to put forward a management plan that was actually sensible in the real world. But the fundamental responsibility for operating and delivering services to the public rested squarely on departments.

    And we did not accept excuses. For example, in the very first round of hearings of the Budget and Expenditure Review Committee, the head of the Justice Department told the committee that he could not meet the mandated budget cuts. He was then dismissed by the premier. That convinced everybody that this was a deadly serious process: failure could result in actually losing your job.

    This sounds like it required a real cultural change at Treasury—away from micromanaging and toward empowering departments to make the tough decisions. How was this achieved?

    First, the succession of leaders within Treasury all subscribed to the philosophy that we were pursuing as a government. Second, I spoke to all the staff members of Treasury a week or so after we took office, and I said that I had only two messages for them. One was that within two years, Treasury had to be recognized as the best in Australia. And the second was that Treasury was no longer the “no gang.” I made it clear their job was not to tell people no. Rather, it was to sit down and work proactively with departments to find innovative solutions that would enable Treasury to meet its goals while allowing line departments to meet their targets. We recruited a lot of people into Treasury, some from the public sector but also from the private sector. The cultural shift was very deliberate, and I think that it was very clearly understood.

    How did you get the public-sector employees on board?

    We spent considerable resources explaining to people what we were doing, why we were doing it, and what we expected the outcome to be. We went to every major hospital during shift changes, often at six o’clock in the morning, to give slide presentations and address the staff. We went to the meetings of teachers and principals and deputy principals. We went right through the public sector trying to spread the message. We got two benefits from that. One, the information we provided influenced people’s perceptions. But far more important was the fact that we went out and spoke to them in their own workplace. The fact that we took the time to do that—and showed respect for them—had an enormous impact on people’s preparedness to embrace change.

    You were pushing on so many initiatives at once. Why did that make sense?

    This was an absolute conviction of the leadership of the government. We had a very strong belief that incrementalism would fail—that we wouldn’t get enough done because we probably wouldn’t be in office long enough to do things sequentially. The approach we took was to figure out how much we could tackle at once and then to move as decisively and quickly on those issues as we thought we could manage. Our view was that if you move on a broad front and you’re moving very quickly, you’ll fracture the opposition.

    What can other governments learn from this?

    Well, there are some things that other governments clearly can’t control. For example, having our opponents create a real crisis and having a community perceive that there was a crisis were really important. Having control of both houses of Parliament was incredibly important because it gave us cohesion and the opportunity to determine priorities and move on a very broad front all at once.

    But then there are a whole lot of things that governments can control and that I think are critical. One is creating unity. Despite the fact that we were a coalition government, there was very substantial unity across the two parties.

    The other is leadership. Jeff Kennett was seen to be resolute. If he announced something, people knew it was going to happen. So the thinking was you had to find a way to make the best of it. I think that dynamic changed the nature of the political environment in Victoria and made it more conducive to the acceptance—and in some cases even the advancement—of change.

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