The Commonwealth bureaucracy has undergone radical change in the past 30 years, but when it starts to impact services (like the ABS jobs data last week) you know there's a problem, writes Ian Verrender.

What happens when your efficiency drive ends up costing you your credibility and starts to impact on your business?

It's a phenomenon many corporations big and small have been forced to confront since the financial crisis dictated radical surgery on the cost front simply to ensure survival.

There comes a point where there are insufficient staff to cope with the work at hand, productivity improvements no longer outweigh the lack of bodies and where a dollar saved results in a greater amount of lost earnings.

Last week, the federal Government felt the sting when its drive to cut red tape and lift bureaucratic efficiency backfired in spectacular fashion.

It emerged that the Australian Bureau of Statistics employment numbers - a crucial measure of economic health - were totally unreliable.

Jobs numbers play a key role in the Reserve Bank's interest rate decisions and in the way the federal Government formulates its fiscal policy. Without decent data, the likelihood of poor economic decisions rises significantly.

Treasurer Joe Hockey was first out of the box, pointing the finger at the previous Labor government for cutting funds to the ABS. The Opposition responded by banging on about Hockey's recent funding cut.

As is usually the case in these matters, both share the blame, pretty much in equal measure.

According to those who work in the bureau, the May budget stripped $68 million from the ABS. That followed a $10 million cut the previous year by Labor. And in the past two years, 350 staff have departed, leaving vital work piling up and those remaining forced to take shortcuts. On top of that, the ABS has been without a chief statistician for months.

It is fashionable in some quarters to run the ideological argument that if small government is good, then by definition, even smaller government is better.

But even the most laissez faire, conservative administrations eventually come to realise that there is a break-even point when it comes to the business of governing.

Hack away at the bureaucracy - the arm that implements policy - long enough, and policy simply is not enacted in a timely or efficient manner.

Legend has it that it was John Howard who took the axe (in the form of a fellow called Max) to the public service after his ascension to power in 1996, only to find that he could get nothing done. He was duly forced to re-hire most of them.

That's not entirely true, on either count. Bob Hawke slashed the public service long before Howard employed hatchet man Max Moore-Wilton to cut a swathe through the bureaucracy. And contrary to popular belief, Howard's cuts were permanent. They were never re-hired.

What has escaped most commentators on public sector cuts, is that the total number of Commonwealth employees has remained fairly static since Howard's 1996 hack, while the economy and the labour force have grown substantially.

According to ABS data - if it can now be believed - the Commonwealth employed about 437,00 public servants in 1987. By the end of the Keating era, that number had dropped to 350,000. And a year after Howard's election, that had dropped to 287,000.

It is worth noting that a large portion of those reductions came about through privatisation of government businesses such as the Commonwealth Bank, Qantas and Telstra.

By May 2007, just before Kevin Rudd swept to power, Commonwealth public servants had been whittled back to 232,200.

Even by the end of the Labor era, despite all the alarmist chatter from thought bubble "think tanks", the number had grown to 248,500, around the same level as through most of the Howard years.

Raw numbers aside, consider this. A year after Howard had sliced and diced the administration, Commonwealth public servants accounted for 4.1 per cent of the workforce.

On the most recent figures, that's now down to just 2 per cent, which hardly suggests a bloated public sector - at least at the Commonwealth level.

During the heat of the recent federal election, when we had a "budget crisis", the incoming government vowed to eject 12,000 public servants, demanding even greater "efficiency dividends" than the Gillard administration.

That could well be counterproductive.

Take the Australian Taxation Office as a case in point. In the recent budget, the ATO had its funding slashed by $189 million with more than 3000 workers earmarked to go.

But in a recently released report, the Inspector General of Taxation, Ali Noroozi, warned the Government that the loss of key ATO experts, particularly in the area of "transfer pricing" posed risks to Commonwealth revenue.

In short, what you save on wages could be dwarfed by a lack of tax revenue.

Embarrassingly, the warning came as Joe Hockey made his high profile call to global financial leaders at recent G20 finance summits to clamp down on tax evasion, specifically in regard to issues such as transfer pricing and profit shifting.

Tax evasion has become endemic. Multinational corporations play governments off against each other, either demanding concessions or through simple arbitrage, by routing profits earned in high tax jurisdictions through tax havens. The opportunity to exploit loopholes is endless.

For the ATO, the problem is not simply a lack of bodies to enforce the law. Ironically, many of those who will be given a golden handshake will end up working in the private sector, advising multinational companies on how best to minimise tax. The nation will end up the poorer. But at least they will be better paid.

The Commonwealth bureaucracy has undergone radical change in the past 30 years. Much of it has been for the best.

Before Howard, it was a Westminster style system where departmental heads often were Knights of the Realm; Yes Minister style mandarins that had run the country regardless of which party was in power and who often viewed their political masters with contempt.

Howard was criticised for politicising the public service, transforming it into a Washminster hybrid model. Unlike the US, some Commonwealth departmental heads survive changes in government.

Those changes modernised the bureaucracy. They lifted efficiency and productivity. But there are limits, a point where crude slash and burn cost cutting starts to cost, particularly if it is not properly targeted.

The biggest criticism of the efficiency dividend approach - now doubled to 2.5 per cent - is that it isn't particularly efficient in lifting efficiency.

While public sector employee numbers have dropped, a recent report by the Centre for Independent Studies points out that the cost of running the service rose 23 per cent in real terms during the first decade of the new millennium.

The report, Withholding Dividends: Better Ways to Make the Public Sector Efficient, found public sector middle management had ballooned while management wages had grown enormously. Where executive level staff accounted for 15 per cent of employees in 1991, they now accounted for 30 per cent.

As you would expect, managers were sacking or not replacing staff to achieve the efficiency dividends. But no one has been culling the managers. It could well be managers were hiring more managers to do the dirty work.

As they say in the commercial world, no one ever cut their way to greatness. If the bureaucracy is to be improved, perhaps a slightly more sophisticated approach is required.

Ian Verrender is the ABC's business editor. View his full profile here.