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1 November 2005 GETTING BETTER VALUE FOR MONEY
IN PUBLIC SPENDING The government has embarked on a review of government spending with the aim of finding savings to offset spending decisions arising out of election commitments and the coalition agreements. This is a welcome initiative. Government
spending has been rising rapidly and is projected to blow out by
a further 2 percentage points of GDP by 2008. This is a massive
increase, which can only be damaging to the economy. Total government spending currently
comprises central government current spending of 30-33 percent of
gross domestic product (GDP), local government current spending
of 2-3 percent of GDP, gross capital formation (both sectors combined)
of 2-3 percent of GDP, and other capital spending of perhaps 0.5-1.0
percent of GDP. At close to 40 percent of GDP, this level of central
and local government spending is inconsistent with sustained rapid
economic growth. Finance minister Michael Cullen
has demurred and pointed out that four OECD countries with such
ratios of government spending achieved real per capita GDP growth
of 4 percent or more since 1985. However, these countries achieved
that feat only for periods of around 5 years. At least a 10-year
period is needed to avoid the bias introduced by cyclical factors
and to be consistent with the government's goal of returning New
Zealand to the top half of the OECD income rankings. No comparable
OECD country with a government spending share around New Zealand's
level has achieved per capita GDP growth of 4 percent or more for
as long as a decade. Those that have grown this fast, such as Ireland
and South Korea, have lower spending ratios. The deadweight costs of taxation
alone make it highly unlikely that rapid growth could be achieved
with high levels of government spending, even if it were uniformly
of high quality. There is ample evidence, however, that much government
spending in New Zealand is wasteful or poorly targeted. The OECD has commented critically
on New Zealand's budgetary processes: "There was, and still
is, no systematic framework for assessing value for money …
Although the budget process forces a detailed examination of new
spending proposals, this represents only 5 percent of total expenditure.
There is no centrally driven, systematic or regular review of the
remaining 95 percent." This is a remarkable statement,
especially given New Zealand's habit of regarding itself as a world
leader in public sector financial management. What can be done about these problems? One proposal advocated by the Business
Roundtable is to complement New Zealand's fiscal responsibility
rules (now re-enacted in the Public Finance Act) by the addition
of a tax and expenditure limit (TEL) provision, along the lines
of the fiscal constitutions of a number of US states. This would
be a 'top down' constraint that would limit the rate of growth of
government spending to population growth plus inflation, unless
voters decided otherwise in a referendum. Surplus revenue would
be returned to taxpayers. There would be provisions to deal with
exceptional circumstances. Dr Cullen has criticised this idea
as undemocratic and ideological. Yet in response to democratic pressures,
many US states and several countries with governments of different
political persuasions have adopted such a rule or variants of it. Another response would be for the
Treasury to establish formal guidelines for government spending.
It is astonishing that none exist. This contrasts unfavourably with
the effort the Ministry of Economic Development has made to improve
the quality of regulatory policy through the requirement in the
Cabinet Office Manual for a Regulatory Impact and Business Compliance
Cost Statement to accompany regulatory proposals. What might a good set of spending
guidelines look like? One possibility would be to adopt a framework
similar to that adopted in the guidelines for evaluating government
regulations. These require, inter alia, that (1) the problem
requiring a possible intervention be defined and its causes established;
(2) a public policy objective be determined that is not so narrow
as to prejustify the recommended policy; (3) all practicable alternatives
be identified, including market alternatives, and (4) the benefits
from the recommended course of action should exceed the costs when
compared to the best alternative course of action. Such a set of
guidelines for government spending would, if adhered to and applied
professionally, make it harder for wasteful spending to persist.
A fundamental review of base spending
is also required. The first step would be a screening aimed at determining
which programmes serve a public purpose and represent an appropriate
role for government. This filter should identify a large
number of activities as candidates for opening up to competition
or withdrawing government from entirely. Leading candidates would be government
commercial enterprises. Exiting from these activities would contribute
directly to economic growth and allow governments to focus on performing
their core roles better. The role of governments in providing
other private goods should be critically assessed. Greater use of
user pays policies, reduced middle class 'churning' and targeted
assistance, in combination with private sector competition, would
reveal whether such services represented value for money in the
eyes of users. The remaining programmes would
be concentrated in the core public good functions of government
that are less amenable to the disciplines of competition and choice.
This necessitates greater emphasis on clarifying objectives, allocating
decision rights and monitoring and rewarding performance. An important
task here would be to revitalise public sector management. The impetus
to better performance dating from the second half of the 1980s appears
to have waned. An approach that has been adopted
by a number of governments would be to set up an independent spending
review commission or task force. Such an exercise would allow the
government to tap expertise from outside the public service and
get well-informed and independent advice. Reducing the share of government
spending in the economy by a combination of keeping spending growth
below the growth rate of the economy and cutting wasteful spending
is feasible, as the experience of many countries demonstrates. In
its recent budget, the Hong Kong government projects a fall in public
spending as a percentage of GDP from 20.2 percent in 2005-06 to
16.0 percent in 2009-10, and a cut in actual spending in that period. Wasteful spending in government
is a worldwide problem that worsened in the industrialised world
with the growth in government from the 1960s. There is evidence
that the expansion of government has harmed economic performance
without improving social outcomes. Effective responses to this problem
require action across a broad front. Fundamental to all of them
is the need for much greater public awareness of the need to focus
government on its indispensable core activities. Roger Kerr is the executive director of the New Zealand Business Roundtable. For more information, contact: Roger Kerr Web: www.nzbr.org.nz |