Those of us out in the real world will not be surrprised by ANZ Chief economist Cameron Bagrie’s conclusion that Government spending is being directed into non productive areas.
His study, prompted by a rise in government spending in relation to the economy, found it impossible to assess whether spending was productive, “because no one really knows the counterfactual”.
So instead, Mr Bagrie examined the spending mix — how much was spent on front-line activities, such as welfare benefits, health and education services and police rather than on “back office” (departmental outputs).
`What we find is that back-office (departmental) expenses have exceeded our definition of front-line spending, resulting in an upward trend.”
Growth in departmental outputs has averaged close to 7 percent a year since 1997 while front-line spending increased by 5 percent.
Nominal GDP growth within the economy averaged 5.5 percent. Government spending as a proportion of GDP has fallen from 42 percent in 1995 to 39 percent in 2001 and risen back to the OECD average of 40 percent in 1997.
Mr Bagrie said if the back-office ratio had remained in line with front-line spending then there would have been an extra $1 billion free for other activities and a cumulative saving since 1997 of $3 billion.
It would not have been difficult for people at the front line of public services to find a good use for that money, or some could have been better spent on tax cuts.
In education, back-office spending had grown annually at 12 percent since 1997, massively outstripping front-line purchases.
Similarly, benefit spending increases had averaged 3 percent while back-office spending had been 7.5 percent a year.
Meanwhile unemployment is at record lows so there are more people in a department helping fewer beneficiaries.
However, in health, the trend was the opposite.
While it was encouraging spending for tomorrow in activities such as education and infrastructure was increasing, it was puzzling relatively more money was going into departmental spending, Mr Bagrie said.
The study found spending in productive government activities (education, law and order, science, housing, defence, employment initiatives, and transport) grew at 5.2 percent compared with those in non productive (departmental outputs, heritage, culture, recreation and economic and industrial services) at 8.4 percent.
That’s a damning indictment on Labour’s priorities.
In another gauge of the spending mix, Mr Bagrie said it appeared growth in spending in “hand-up” activities (front-line education excluding student loans and employment initiatives) was outpacing “hand-out” (benefits) by 4.4 percent to 3.3
At least that is encouraging.
Mr Bagrie acknowledged shortcomings in his definitions and noted the Government may have been playing “catch-up” in departmental spending due to previous under-spending.
He said there were no benchmarks and the mix of spending was not necessarily wrong, particularly as spending priorities were the result of living in a democratic society.
“Nonetheless, we believe the trend across our gauges is sufficiently clear: more government spending is being directed at areas that are not going to the front-line and for consumption today relatively to tomorrow.”
Mr Bagrie said there needed to be measurable benchmarks introduced into the Government’s stated objectives such as the Fiscal Strategy Report.
However, he said the requirement for transparency and rigorous analysis of spending could be overdone and may be part of the problem. Many resources in education and elsewhere were tied up in approval and monitoring rather than simply getting the job done.
In other words too much time, energy and money is wasted on form filling and box ticking.
With 41 government departments, 65 crown entities, 21 District Health Boards and 9 Crown Research Institutes, Mr Bagrie said it may be time for a repeat of the 1980s “quango hunt” to slim government down.