12 th Annual Public Sector Finance Conference Government Spending Roger Kerr 18 August 2008.
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Transcript of 12 th Annual Public Sector Finance Conference Government Spending Roger Kerr 18 August 2008.
12th Annual Public Sector Finance Conference
Government Spending
Roger Kerr
18 August 2008
Spending, Productivity and Economic Growth
• “The literature is indeterminate about the relationship between government spending and economic growth”
• Lazy statement• No OECD country has sustained fast per capita
growth with government spending at 40% of GDP
• New Zealand’s current ratio (central plus local government) now 42.4% of GDP
• Australia 32.9% (second lowest in OECD)• Singapore and Hong Kong below 20%
Some empirical findings
• “Empirical literature increasingly supportive of negative impacts of taxes on GDP, productivity, investment”
– Norman Gemmell, Treasury
• Taxes a major factor in higher productivity of United States relative to Europe
– Ed Prescott
• Winton Bates: How Much Government? The Effects of High Government Spending on Economic Performance
• Keith Marsden: Big, Not Better?
Comments
• Quantity matters
• Deadweight costs of taxation (up to $2 for every $1 of tax at the margin)
• Quality also a problem
• Other impacts: inflation, competitiveness, productivity
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1992-2000 2000-2007
Labour productivity average annual growth rates
% increase
NZ Measured
Sector
AU Market Sector
AUMarket Sector
NZ Former
MeasuredSector
(Source: Capital Economics Limited, Australian Bureau of Statistics & Statistics New Zealand 2008)
Conceptual basis for government spending
• Need government spending on core roles
• Public goods and a safety net
• Might justify spending of 15% of GDP (Ted Sieper)
• Social outcomes not superior with big government (Tanzi and Schuknecht)
• Winton Bates: Reducing low quality spending from 40% to 30% of GDP could raise growth by 0.5% pa for 10-25 years
Quality
• Widespread view that much spending does not represent value for money
• Audit Office reports
• 95% of base spending not reviewed
• No Treasury criteria for government spending (cf guidelines for regulation)
• Focus must be on programmes (Is the programme justified? At what level? Is it achieving goals?) and cost of inputs (especially labour)
Examples of poorly justified spending
• Middle-class welfare - churning
• Criteria for benefits (US-style reforms)
• Debt servicing (Cullen Fund, SOEs, Reserve Bank FX injection)
• Corporate welfare
• KiwiSaver subsidies
• John Gibson research on pay differentials
• Bureaucracy
Number of Staff in MSD and Number of Benefits
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
9,500
10,000
2002 2003 2004 2005 2006 2007
FT
E s
taff
790,000
795,000
800,000
805,000
810,000
815,000
820,000
Ben
efit
s
FTE staff in MSD Number of benefits
How to control government spending?
• Across-the-board cuts make no sense– Would you do that with a household
budget? – not all spending of equal value
• Need a focus on quality
plus
• A top-down tax and spending limit
Obtaining better value for money
• Start with Treasury spending guidelines
• Exit private goods activities and contract out
• Introduce choice and competition (eg health, education, ACC)
• Review base spending on basis of guidelines
• Use independent task force (Californian exercise recommended savings of US$32 billion)
• Reform Local Government Act 2002
Introduce top-down constraint
• Fiscal Responsibility Act/Public Finance Act not an effective discipline
• MMP a compounding factor• Business Roundtable favours a Tax and Expenditure
Limit (eg population growth plus inflation) unless taxpayers approve higher spending via a referendum
• Surplus revenue to be returned to taxpayers (cf 2008 Hong Kong budget)
• Many similar concepts: Hong Kong Basic Law, US states, US federal proposal in Friedman’s Free to Choose
• Apply similar rules to local government