Will public service cuts hurt the capital?

20:36, Jun 19 2011
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ON THE BLOCK: Wellington has always been a public service and governmental city - will cuts to that sector hurt our city?

Fran Wilde has been collecting the clippings. "Stop relying on state sector, Wellington warned", reads one, which she tosses out across the table in her Greater Wellington regional council office. "PSA fears hundreds of jobs will be lost", reads another. "Capital property owners hit hard", goes the next one.

"And that's only a few of them," says Wilde, the council's chairwoman and the politician with the closest thing to an aerial view of the region. "Every day, I pull these things out of the paper. And you could get very depressed, living in Wellington."

She sighs. She does look slightly depressed. "But been there, done that," she says. "We'll get through it," but it's going to be a "hard haul".

If this sounds a bit odd, a bit out of keeping with most of what we hear about Wellington, that's understandable.

On the off-chance you missed it, the city's been voted the "coolest little capital in the world" by travellers' bible Lonely Planet. It's keenly promoted as the cultural heart of the nation, a mecca for the arts and creative sector. Movie stars live here, for crying out loud. Our biggest civic crisis in years has been whether to proceed with a derivative white sign on a suburban hillock. What is there to worry about, right?

Unfortunately, it turns out the answer might be "quite a lot".

A report prepared for Wellington City Council last year as it tried to come up with a 30-year vision for the city suggested we could be at a "turning point in the city's fortunes".

"While our quality of life may be attractive to skilled talent, so far it has not translated into sustained economic gains."

Why? A "gradual but relentless northward drift of corporate business in the last two decades, slowing migration to the city ... rising office vacancy rates, generally low workforce population growth and a narrow jobs sector".

Over the 10 years to 2008, the Wellington region's GDP grew by 2.9 per cent  against a national average of 3.3 per cent. Since then, it's been slower still. Our big economic development plan introduced four years ago has just been given a lukewarm review.

"We had some growth targets in that," Wilde says. "Well, we haven't reached them in Wellington. So it has been quite a slow time the last few years for us. And now this is all on top of that."

"This" is the $1 billion of cuts over the next three years to the public service heralded by Finance Minister Bill English. The reason for all the clippings. The elephant floating on Wellington harbour.

After a first term already characterised by line-by-line spending reviews and recitations of our precarious financial situation, English signalled last month that cuts were about to go further.

Departments once split apart for efficiency gains are to be rolled back together to reduce duplication. Huge ministries must find room in their budgets for hundreds of millions of dollars of Kiwisaver payments, previously covered by a separate fund. The Public Service Association suggests that hundreds more jobs will be lost from the state sector.

"No matter which way you look at it, that's $1 billion coming out of the economy," says the union's national secretary, Richard Wagstaff.

"Wellington's economy is still very reliant on the public sector  and it will have a serious impact, there's no question about that," says Nigel Kirkpatrick, chief executive of economic development agency Grow Wellington. "I suppose you say hopefully it won't happen at a brutal speed so that some of the other things that are growing in the city and the region will offset it."

"There is a serious amount of pain starting to be felt," says developer and property council head Ian Cassels. His tenants are asking for decreased rents or special payment arrangements. Something like one-sixth of the office space in Wellington will soon be vacant.

After English made his announcements, he told a Hutt Valley business lunch that Wellington ought to get its act together and start diversifying.

Let's leave aside the merits of the cuts themselves - an endless ideological debate. They're coming. The question here is: what effect will they have on Wellington? Are we in for years of economic woe  or can we find a way to weather this?

It's not all uncharted territory. From the mid-1980s to the mid-1990s, New Zealand's state sector was famously dismantled. Entire departments vanished. Big infrastructural assets were sold off. Public service numbers fell from more than 70,000 to little more than 34,000 in a decade. (Though that latter number doesn't include employees shifted into state owned enterprises and the like). All this sent a wrenching shock through the economy. Long-protected manufacturing industries fell apart. In Wellington, big corporates that had previously felt the need to be close to their government patrons started moving their head offices to Auckland (65 big companies based themselves here in 1985; by last year, that number was 24).

"We got slaughtered," says Cassels. "There was a joke: people used to say, 'Would the last person out turn the lights out?' And it wasn't that funny ... "

The whole country felt the pain, but Wellington lagged for years behind other centres, especially Auckland, in emerging from recession.

Wilde, Wellington mayor from 1992 to 1995, remembers it as the time when the "Absolutely Positively Wellington" tag was introduced. It wasn't a tourism slogan at the start, she says. "Originally it was like giving permission to people to celebrate their own city. There had been job loss and it was hurting people. So it was a rallying cry really to Wellingtonians, who took it up with enormous vigour and support."

An Evening Post story from 1993 was already looking back at the "gutting" of the city  everything from a halving of foot traffic on The Terrace, to a big drop in train trips, to the dying out of walk shorts, "considered a motif of the male Wellington public servant".

But there was a flipside to the upheaval of that decade. As any Wellingtonian over the age of 40 can attest, the city used to be boring, devoid of most of the cafes and culture and nightlife that are now its hallmark. "Cardigan City," it was called, the Evening Post article explains. The huge bureaucracy was part of that. So were the protections that filtered out so much of the rest of the world. When they were undone, some argue it spurred skilled people into new ventures.

"One of the results of the 1980s was that many people took their redundancy and set up their own business," says Bank of New Zealand chief economist Tony Alexander.

Wellington Employers' Chamber of Commerce chief executive Ken Harris says that's a feature of our economy whenever government or big corporates shed staff. "Some people think it takes a long time for public servants to get into business. I would argue that it happens much more quickly than people realise."

It's one reason he's supportive of English's plans, even though he acknowledges they'll create short-term pain in the city, especially for retailers.

Wilde says the 1980s' big shifts prodded us into developing new industries. "Tourism was nothing in the early 90s  we didn't have a visitor sector as such. Now we are, I read somewhere, the biggest winter destination in the country for New Zealanders."

Not everyone's gloomy about how Wellington's going to fare this time. For one thing, unless a second-term National government really does go into overdrive, the cuts won't be of the magnitude of those imposed by former finance ministers Roger Douglas and Ruth Richardson.

Harris says: "I think what are being called 'public sector cuts' is just a bit of political positioning. There will be some adjustments. They will hopefully improve productivity and efficiency. [But] I'd be a little surprised if there were big job losses."

Alexander expects the effect on the Wellington economy to be limited. "Rather than going out and making people redundant, they're pulling back on the hiring, so it's a gradual thing."

State Services Commission figures show that 1886 core public service jobs were cut between National's arrival in government and the end of last year. While that's substantial, it's still small compared with the deep cuts of the 1980s. It also doesn't get close to reducing bureaucrat numbers to the levels seen before years of expansion under the last Labour-led Government.

Grow Wellington's Nigel Kirkpatrick says the public service has changed massively since the cuts of 20 years ago. It used to offer a "job for life"; now it's more similar to business, which makes it easier for people to move.

"The signs for the future in Wellington are stronger. There is a better base of more innovative techy-type companies coming out. And probably 10 or 20 years ago, we didn't really have any of that."

Then he sounds the obligatory low note: "But I don't want to ever say it's all good, don't worry about it. It will still have an impact."

Here are the industries people tout when asked what else Wellington has got going on: film, tourism, education, IT, niche manufacturing, fashion, food and the arts.

Wellington Mayor Celia Wade-Brown is ebullient about our situation. "Some of us wonder if Mr English has got out of the Beehive," she says in response to the finance minister's challenge to the city. "Because Wellington's not a public-service town anymore. We've got creative and service industries thriving. Companies like Trade Me and Xero, the film giants in Miramar, there's a far wider diversified economy already."

She points out that Wellington has already been dealing with government cutbacks since 2008. "Despite the last job losses in the public service, our economy still grew  modestly, but it grew by 1.4 per cent, which is better than average in New Zealand."

BNZ's Alexander agrees the city can't be typecast. He expects us to keep growing through the next set of cuts. "I think it's wrong to view Wellington as a one-dimensional city. That's not the case."

Growth is coming from everything from the Hobbit movies to "strong underlying support" from the tourism and fashion sectors. Even high unemployment around the country has one upside for Wellington, he says. Young people looking to upskill flow through the region's educational facilities.

Ken Harris says some sectors are hurting but others are holding up well.

"It was very exciting to see [plastics manufacturer] Flight actually moving into what used to be the Griffin's factory. That's a classic example of the new taking over from the old."

Wellington's web and technology scene is full of exciting start-up ventures, some of which are generating hype in Silicon Valley.

But let's not kid ourselves. As of June last year, 19,007 core public sector workers were located in Wellington. The Government is the city's single biggest employer. At least one in every 10 workers in Wellington is a bureaucrat.

That reputation Wellington has for having the most-educated, best-paid population in the country? That's mostly because of the public service.

More than any other group, they're the ones who eat at our cafes and buy tickets to our busy calendar of shows and exhibitions.

And it's hardly just public servants who feel the cuts. Wellington is also home to an army of other businesses that rely on the government to survive, from IT companies to PR firms to policy consultants.

A few of these firms do better when holes appear in the standing public service, but many are among the first casualties of budget cuts. Some have already folded since 2008; plenty more are hurting.

About 40 per cent of the city's office space is taken up by government tenants, Ian Cassels says  "but I'd be surprised if there wasn't another 10 per cent taken up by firms that consult or provide services".

It's also true that departments typically direct their first barrage of cuts away from Wellington. Wellington Central MP Grant Robertson lists the outfits that have already downsized or closed regional offices: IRD; Fisheries; Child, Youth and Family; ACC; the New Zealand Transport Agency. This means we've probably been shielded from some of the pain up until now.

So, yes, we do have a range of exciting, burgeoning new industries developing in Wellington. But they don't rival the public service for size.

The screen and digital sector had 1339 employees in the region last year, for example. The ICT sector had 7700. The manufacturing industry had 13,370.

"All our eggs are not in the public sector basket, but it will be a big hit for us," Wilde says. "Because particularly we're talking about back-office services, which are the ones located in the head offices in Wellington."

There's another, more intangible impact that government cuts inevitably have on Wellington. That's what it does to the city's morale, its sense of itself.

Certainly the mood in government agencies at a time like this is full of stress and uncertainty. Productivity plummets because people fear for their jobs, but also because shoestring budgets mean many who remain have less work to do than they did a couple of years ago.

Grant Robertson's been visited at his electorate office by public servants who have lost their jobs over the past few months. They're in their 40s and 50s, without much experience outside government, and they're having to sell their homes and face a future full of doubt.

"The human face of this has been really hard. People are struggling. And they're not people who are suddenly getting great amounts of consultancy work or anything. They're rank-and-file public servants. They've had their first interactions with Work and Income in their entire lives."

So what is there for Wellington to do? Just bear it? Wait for the next left-wing government? Hope that Peter Jackson makes a seven-part movie out of The Silmarillion, Tolkien's boring history of Middle-earth?

Actually, there are a few things that would help. Plenty of city leaders say getting long-haul flights in and out of Wellington airport is the single biggest thing we could do for our economy.

"That would have a tremendous effect on Wellington," says Ian Cassels. "It would be like someone taking your foot off your throat."

"[It] is one of our big negatives," Wilde says. "Certainly in my lifetime I've seen a flight of export businesses to Auckland to be near the international airport."

Then there's the matter of our byzantine local government arrangements. On the national stage, we're getting drowned out, Wilde says.

"Christchurch is now being run by the government, with all that money going in. And Auckland is big and ugly and actually can command attention. We can't command the sort of attention that Auckland can."

That's why she's calling for a new body that would sit above local councils and give the region a strong single voice.

There's huge concern, too, about Crown Research Institutes being shifted. Industrial Research has already been told its future lies outside of its current base in the Hutt Valley, which mayor Ray Wallace predicts will be "devastating for the Wellington region".

And then there is the tricky goal of fostering new businesses and industries. Tourism and the cultural sector show it can be done. Others, like the technology sector, hold plenty of promise.

But it's an open question how much we can influence the process. That review of our big economic plan, the Wellington Regional Strategy, concludes that it has failed to live up to its ambition and "has suffered from too many activities and initiatives".

Robertson says economic development agencies like Grow Wellington haven't been focused enough. "There's been a tendency to try to pick sector winners, and you have to be careful doing that."

Kirkpatrick says the region's councils are on to the challenge, but they have limited budgets and they can't stand in for business. There's now a strong focus on growing Wellington as a digital centre, he says.

Wade-Brown says there's no silver bullet  "we're not going to solve this with only marine energy, or only digital, or only service industries, or only tourism".

There will always be a strong government sector in Wellington, she says. "But we can't just sell to public servants. We have to sell to the world."

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