The elephant in the room: India’s infamous bureaucracy.I’m starting to suspect the federal government – of whatever colour – has lost its ability to control its own spending.
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Even if this is, as yet, only partly true, governments are likely to have unending trouble returning the recurrent budget to balance and keeping it there, let alone getting it into surplus so as to pay down debt.

Those of us who worry about such things have given too little thought to the causes of the Abbott-Turnbull government’s abject failure to achieve its oft-stated goal of repairing the budget solely by cutting government spending.

It’s common to blame this on political failure and obstacles. There’s truth in most of those excuses, but they miss the point. Spending restraint will never be easy politically, governments rarely have the number in the Senate and their opponents will always be opportunistic.

That’s why governments need to be a lot clearer about what they’re seeking to achieve on the spending side, and a lot more strategic in how they try to bring it about.

On ultimate objectives, the goal of literally smaller government – smaller than it is today – is a pipedream. Government spending is almost certain to rise over time – don’t you read Treasury’s intergenerational reports? – meaning taxes will have to rise over time.

But there are obvious limits to voters’ appetite for higher taxes, which is why governments need to be able to control the rate at which their spending is growing, and do it not by cost-shifting to other governments or service recipients – as was the approach in the failed 2014 budget – but by ensuring ever-improving value for money through greater efficiency and effectiveness.

Unless governments lose their obsession with welfare spending (most of which goes to the aged) and come to terms with the other two really big items of government spending, health and education – especially when you consolidate federal and state budgets – they won’t get far with controlling the rate of growth in their spending.

What too few people realise is how much of government spending goes not directly into the pockets of voting punters, but indirectly via businesses big and small: medical specialists, chemists, drug companies, private health funds, private schools, universities fixated by their ranking on global league tables, businesses chasing every subsidy they can get, not to mention international arms suppliers.

The budget, in other words, is positively crawling with vested interests lobbying to protect and increase their cut of taxpayers’ money.

A government that can’t control all this potential business rent-seeking – isn’t perpetually demanding better value for taxpayers; perpetually testing for effectiveness – is unlikely to have much success in limiting the growth in its spending.

Which brings me to my fear that government has already lost that ability.

A wrong turn taken early in the term of the Howard government – when the Finance department moved most responsibility for spending control to individual departments and got rid of most of its own experts on particular spending areas – plus many years of “efficiency dividends” (these days a euphemism for annual redundancy rounds) have hollowed out the public service.

The spending departments have lost much of their ability to advise on policy, while the “co-ordinating departments” – Treasury, Finance and Prime Minister’s – have lost much of their understanding of the specifics of major spending programs.

This matters not just because the departments have become increasingly dependent on outside consultants to tell them how to do their job – and to be the for-profit repositories of what was formerly government expertise – which could easily be more expensive than paying your own people.

The big four chartered accounting firms were paid $1 billion in consulting fees over the past three years, thus introducing a whole new stratum of potential rent-seeking.

More importantly, the longstanding practice of having specialised departments – one each for the farmers, miners, manufacturers, greenies etc – makes them hugely susceptible to being “captured” by the industry they’re supposed to be regulating in the public interest.

The departments soon realise their job is to keep the miners or whoever happy and not making trouble for the government.

The Health department, for instance, would see its primary task as dividing the taxpayers’ lolly between the doctors, the chemists, the drug companies and the health funds in a way that keeps political friction to a minimum.

How much incentive do you reckon this gives the spending departments to limit their spending, root out rent-seeking and lift effectiveness?

That’s why, by denuding the co-ordinating departments of people who know where the bodies are buried in department X, government has lost a key competency: the ability to control the growth in its own spending.

Ross Gittins is the Herald’s economics editor. Twitter: @1RossGittins


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