The False Economy of Cutting Government Jobs: When “Saving Money” Costs Taxpayers More

Cutting government jobs is one of the easiest political promises to sell. Fewer public servants. Smaller departments. Less bureaucracy. Lower government spending. On paper, it sounds like efficiency.

But there is a fundamental problem with treating every public-sector salary as a cost to be eliminated: some government employees save or recover far more money than they cost.

Tax investigators uncover fraud. Regulators prevent misconduct. Cybersecurity teams protect government systems. Procurement specialists stop taxpayers being ripped off. Inspectors enforce workplace and safety laws. Experienced policy staff reduce the need for expensive consultants. Cut too deeply into those functions and the savings can quickly become a false economy. Australia’s experience with the Australian Taxation Office provides one of the clearest warnings.

Australia has already tried dramatically shrinking the Tax Office

Beginning in 2013, the ATO went through substantial workforce reductions. The Australian National Audit Office reported in 2016 that the ATO had committed to reducing staffing levels by more than 3,000 employees since July 2013. The ANAO specifically warned that these reductions, combined with organisational restructuring and the ATO’s broader transformation program, limited the assurance it could provide about the effectiveness of the agency’s arrangements for dealing with the cash economy.

This was not a minor trim around the edges. The ATO is Australia’s principal revenue-collection agency. Its job is not simply processing tax returns. It investigates avoidance and evasion, identifies suspicious transactions, audits businesses, combats organised financial crime, manages debts and protects the integrity of a tax system responsible for funding almost everything governments do.

Reducing its capability therefore creates a very different equation from eliminating an unnecessary administrative position. A tax compliance officer may cost the government money in salary. But that same officer may recover several times that amount from people and businesses that would otherwise avoid paying what they owe.

Tax compliance can actually make the government money

The government’s own numbers demonstrate how strange it can be to treat tax enforcement purely as an expense. An ANAO examination of specially funded ATO compliance programs found projected returns ranging from approximately $3.29 to $11.76 for every dollar invested.

For most programs examined, the ATO’s internal results actually indicated returns above those originally projected. The ANAO appropriately cautioned that these returns would be more meaningful if they were measured using cash actually collected rather than simply tax liabilities raised.

Nevertheless, the principle is difficult to ignore. If spending $1 on enforcement can potentially recover several dollars of revenue, cutting that dollar merely because it appears on the expenditure side of the Budget is not necessarily fiscal discipline.

It can be the exact opposite. The ANAO also found that the ATO reduced its internal base funding for compliance activities by $164 million during this period of lower overall funding. Remarkably, there was no corresponding forecast estimating how much revenue might be lost because of the reduction in compliance funding. Government accounting can therefore produce a political illusion. The salary that disappears is immediately recorded as a saving. The tax fraud that is never detected is much harder to see.

Then came an extraordinary GST fraud explosion

Years later, Australia experienced one of the most remarkable examples of large-scale tax fraud in recent history. From late 2021, a scheme began spreading through social media encouraging people to register fake businesses, lodge false business activity statements and claim GST refunds to which they were not entitled.

By May 2022, the ATO said it was investigating around $850 million in potentially fraudulent payments involving approximately 40,000 people. The numbers ultimately became substantially larger. The Auditor-General’s investigation into the ATO’s handling of GST fraud found that the agency estimated more than 57,000 perpetrators had participated.

By June 2023, the ATO had raised around $2 billion in primary liabilities associated with Operation Protego and had stopped another $2.7 billion in suspicious GST refunds before they were paid. This was not simply a handful of sophisticated organised-crime groups exploiting obscure tax law. The scheme became so widespread that false GST refund methods were being promoted on social media. And at one point, the scale of suspicious refunds became greater than the ATO’s normal operational capacity to deal with them.

The Auditor-General found that after new risk models were deployed in January 2022, it became clear to the ATO that potential GST refund fraud exceeded its business-as-usual capacity to treat. The agency eventually had to reallocate approximately 470 staff into GST-related engagement, complaints, reviews and audit work as part of its response. That sentence should matter whenever politicians promise enormous reductions in government staffing. Capacity that appears unnecessary during normal circumstances can become extremely valuable when something goes wrong.

The ATO cuts did not simply “cause” Operation Protego

It is important to be fair about what the evidence says. There is no credible basis for saying that cutting thousands of ATO positions beginning in 2013 directly caused a social-media-driven GST fraud scheme nearly a decade later.

Technology changed. Fraud techniques changed. Social media allowed fraudulent strategies to spread at extraordinary speed. The design of Australia’s GST refund system also required the ATO to balance fraud prevention against quickly providing legitimate businesses with refunds. But the subsequent Auditor-General investigation identified genuine institutional weaknesses.

The ANAO concluded that the ATO’s strategies for preventing GST fraud were only partly effective. Its framework for assessing and managing GST fraud risk was described as not fit for purpose, and the ATO did not have an established strategy for responding to a fraud event on the scale eventually encountered. Its detection and response mechanisms were assessed more favourably, as largely effective. The lesson therefore is more nuanced, and arguably more important.

Government capability matters.

Staff, expertise, institutional knowledge, technology, risk management and enforcement capacity are not things that can always be rebuilt overnight when a crisis appears.

And the GST problem has not disappeared

Australia’s broader GST compliance gap remains enormous. The ATO’s latest estimate puts the net GST gap at approximately $8.7 billion in 2023–24, equivalent to about 9.4 per cent of the theoretical GST liability. That was up from approximately $8.1 billion in 2022–23. The GST gap should not be confused with GST fraud.

It includes a much wider range of factors such as mistakes, insolvency, non-payment, undeclared economic activity and deliberate non-compliance. But $8.7 billion still illustrates the enormous amounts at stake when governments decide how much they are willing to invest in tax administration and enforcement. This is why governments continue funding compliance programs.

For example, the 2024–25 Budget estimated that extending the ATO’s Shadow Economy Compliance Program would increase receipts by $1.9 billion, while associated payments were estimated at about $610 million. The same Budget estimated that extending the Tax Avoidance Taskforce would produce another $2.4 billion in receipts, against approximately $1.2 billion in additional payments. That is government spending being used to generate considerably more government revenue.

Cutting public servants can also simply move the bill somewhere else

There is another problem with politically imposed public-service caps. The work often does not disappear, it gets outsourced. Australia’s 2021–22 Audit of Employment discovered 53,900 full-time-equivalent external workers being used across 112 Commonwealth entities, at a cost of approximately $20.8 billion.

That external workforce existed alongside roughly 144,300 directly employed public servants in those agencies. Not all contracting is bad. Government will always need outside engineers, lawyers, technology specialists, consultants and temporary expertise for particular projects.

But artificially restricting the number of public servants can produce a strange outcome: government proudly announces that it has reduced its employee headcount while paying private companies to provide people to perform work that government still needs done.

The employee disappears from one column of the spreadsheet. The work and often the cost, simply appears in another. There can also be a less visible cost: institutional knowledge. A permanent employee may spend years understanding a particular tax scheme, regulatory environment, computer system or industry. When that capability is continually outsourced, the expertise can leave whenever the contract ends. Government then has to buy it again.

Efficiency should mean getting better value, not simply employing fewer people

None of this means every government department should continually expand. Governments should absolutely remove duplicated roles, automate repetitive processes, consolidate systems and stop programs that no longer work.

Taxpayers deserve an efficient public service. But efficiency and headcount reduction are not the same thing.

A government that eliminates a $100,000 compliance position but consequently loses $500,000 in recoverable revenue has not saved $100,000. It has lost $400,000.

A department that removes experienced technology employees and then spends twice as much purchasing the same capability from contractors has not become smaller in any meaningful economic sense. And a regulator that lacks enough investigators to detect fraud may appear inexpensive right up until billions of dollars begin disappearing.

Government is not a corporation and taxpayers are not shareholders

Governments certainly have an obligation to spend responsibly but public institutions perform functions that cannot always be judged by whether they reduce this year’s operating expenses. The ATO protects revenue. ASIC protects markets. Services Australia administers enormous payment systems. Cybersecurity teams protect government networks. Regulators protect workers, consumers and the environment.

Their value is often measured partly in things that do not happen: the fraud prevented, the tax evasion detected, the data breach stopped, the unsafe workplace corrected or the bad procurement decision avoided. Those benefits are much harder to put into a political announcement than “10,000 jobs cut”. But they are real. Australia’s GST fraud experience should therefore be remembered whenever reducing the public service is presented as an automatic Budget saving.

Sometimes government can become leaner and more efficient. Sometimes a job genuinely is unnecessary. But sometimes the person whose salary looks expensive is the person standing between taxpayers and a much larger bill.

The question should never simply be how many public servants we can cut.

The question should be:

What will it cost us when they are gone?

References

• Australian National Audit Office, Strategies and Activities to Address the Cash and Hidden Economy.
• Australian National Audit Office, Meeting Revenue Commitments from Compliance Measures.
• Australian National Audit Office, Australian Taxation Office’s Management and Oversight of Fraud Control Arrangements for the GST.
• Australian Taxation Office, GST refund fraud attempts / Operation Protego.
• Australian Taxation Office, Latest estimate and trends for the GST gap.
• Australian Government Department of Finance, 2021–22 Audit of Employment.
• Australian Government, Budget 2024–25 — Strengthening Tax Compliance.