By Bryce Wilkinson*
Governments spend money irresponsibly when they don’t care much whether the wellbeing outcomes for New Zealanders justify the amount being spent.
This is happening on a grand scale. That is the conclusion of a wide ranging review of the evidence that was published last week by The New Zealand Initiative.
The report, Fit for Purpose? Are Kiwis getting the government they pay for?, was written by the author of this article. NZ Initiative executive director Oliver Hartwich wrote the foreword.
Reports by the New Zealand Productivity Commission have identified the key aspect of the malaise. It is that government agencies are not rewarded for focusing on outcomes relative to resources spent. So they largely do not. Aspects of productivity that could be measured may not be. Aspects that are measured tend to be neglected.
In a nutshell, what is difficult to achieve and is not being measured is unlikely to be achieved. Productivity in government is difficult to achieve.
A headline finding in the report was from a 2013 report for the Canadian think tank, the Fraser Institute. Its author, Lakehead University economist, Professor Livio di Matteo, compared wellbeing outcomes to government spending across 33 member countries of the OECD.
He found that South Koreans were getting the best outcomes relative to spending. Most were falling well short of this benchmark. So was New Zealand. On South Korea’s performance, it could achieve similar wellbeing outcomes to those in New Zealand by spending one-third less.
Government spending for New Zealand on his measure is running at around 40% of GDP. This is the most-cited OECD measure. It encompasses all central and local government current spending plus some net capital spending.
One third of 40% of GDP is around 13%. Thirteen percent of GDP today is a big number. It represents around $20,000 per household annually. That represents around twice what the average household is spending annually on food.
To be clear, this is not a measure of spending that is being literally wasted. Instead, it measures spending that appears to be ineffectual from an overall community viewpoint. It might benefit someone’s wellbeing at an equal cost to someone else’s. Indicatively, New Zealand governments could spend that much less without impairing overall community wellbeing if they could spend as well as South Korea.
The report sees such assessments as primarily motivational. They provoke questions they do not answer. They do not show what New Zealand would need to change. They make no case that the implied changes are feasible. They do not even explore whether the relatively good outcomes for South Korea are due to favourable non-spending considerations.
Their contribution lies instead in identifying countries that appear to be doing better. There is value in that. We should not be too proud to learn from the best performers.
Some might dismiss the South Korea benchmark on the basis that it does not have the large welfare states that abound in Europe and afflict Anglo Saxon countries. They have a point.
It is unthinkable that government in New Zealand could adopt South Korea’s more limited state welfare system. As things stand, New Zealand could not speedily cut spending on, say, health, education, or welfare including New Zealand Superannuation by 13% of GDP and expect to see anything other than an unacceptable fall in wellbeing for those affected.
The point to reflect on instead is why the wellbeing outcomes for South Korea are much higher than in New Zealand when its welfare spending is much less. After all, it is hard to think of any group that is happy with the outcomes from state welfare in New Zealand. They are pretty dire for somewhere between 10% and 20% of the population.
Around 15% of New Zealanders by age 18 have been brought to the attention of the authorities by age 18 for abuse or neglect reasons. Too many households have unsafe family structures.
Around 17% at age 15 lack basic numeracy and literacy. These youths have limited prospects for achieving their potential in life.
Worse, this is a self-replenishing intergenerational pipeline. Its flow maintains the reservoir of adult misery, at a great cost to taxpayers and its victims.
Of course, the above proportions who are abused and near-illiterate will never be zero. But surely they are far too high.
Public debate would be better informed if officials told us what could be said about the corresponding statistics for the successful Asian countries, such as South Korea, Hong Kong, Singapore, Taiwan and Japan.
We can’t learn from others if we do not study them. Would a study show that their family structures are more traditional and safer on the whole? If so, why the difference?
It matters if taxes are too high because ineffectual spending is too high. (The report shows that taxation in New Zealand takes a higher proportion of national income (approaching 33% for central and local government combined) than in almost any relatively prosperous country with a sizeable population. It was much smaller before we grew the proportion of the working-age population on welfare benefits to the 10% figure it has averaged during the last five years.
It matters because taxes have hidden community welfare costs. They arise because people alter their behaviour to avoid paying taxes on the one hand or to make themselves eligible for a government spending programme on the other.
The incentive to do so is greater the larger the tax rate. For some welfare beneficiaries, this is close to 100% of an extra dollar they might have chosen to earn by paid work.
When people reduce their working hours to avoid tax, they lose something they would have otherwise benefited from and so do those who would have bought the product of their labour. The combined loss is a welfare cost.
Wellington-based economists John Creedy and Penny Mok estimated the welfare costs in New of raising an additional tax dollar. They calculated that additional cost to the community ranged from “about 5 cents for single men to over six dollars for low-income single parents”. For the total population the marginal welfare cost was 12 cents in the dollar.
They caution that these results are specific to the model they used and the nature of the posited tax change. So they are illustrative rather than definitive.
Why the big differences? The data is telling us that people’s responsiveness to tax rate changes depends on their situation, for example, their income situation in the household. Single men tend to be in full-time jobs. They tend to stay in them if there is a small increase in tax rates. The community welfare loss is small, even if their loss is large. People in part-time or casual jobs tend to find it easier to reduce hours worked or drop out of the labour force altogether. So women’s hours in paid work might respond more on average than men’s to a change in hours worked. Would-be buyers of the forgone community production lose, too. The result is a greater community welfare loss.
In short, redistributive government spending, which is what most government spending is today, is not benign. It reduces community welfare unless it provides a demonstrable offsetting community benefit. Sadly, the existence of one is evidently not important to governments.
The report quotes the Productivity Commission’s finding that “[t]here is little regard and systematic review of the value for money from existing expenditure”. That tells us that the governments of the day have not required them to do so.
So should we just blame the politicians? The report argues that this would be too facile. General election campaigns have become a demeaning lolly scramble of irresponsible spending promises. That is the electorate’s doing, not the politicians’.
Deeper thinking is needed and more public awareness of the problem of inadequate attention to value for money. The Initiative’s report is a contribution to that cause.
*Bryce Wilkinson is a senior fellow at The New Zealand Initiative.
25 Comments
What irresponsible *lack* of spending?
What happens when government refuses to use its buying power wisely and in a planned, co-ordinated way?
What happens when one part of government causes costs or negative externalities for another part such as immigration vs investment in transport infrastructure?
These articles love to make out that government is responsible for many of the woes in the world and yet the same writers will be the first to advocate "running back to mummy" for corporate welfare, favorable loans, bank bailouts or government guarantees.
Having lived in South Korea for a year I can tell you that:
- Korea practices a state-led economy where their large companies are favoured through import protection, government contracts and low interest loans
- Half of Korean women work in the home and for many university is a place to meet your husband
- Welfare state is minimal with strong reliance on family for housing, childcare by grandparents, health care via private insurance
- Most people live in state-subsidised apartment blocks and have done since the Korean War flattened the country
- Foreign goods in particular those from Japan are actively shunned
- Quality of life and environmental sustainability is not great.
South Korea is a cool and dynamic place that has had a vision of being a wealthy country and is fulfilling it using all the state-led methods of capitalism that the writer no doubt dislikes.
Maybe the better question is why we in NZ now leave our economic and societal development to chance compared to the Koreans?
Simply not true - prices will change - new technologies will emerge - life will carry on.
We ran out of whale oil - did that affect our lives ?
We could run out of copper for wiring the internet - along came wireless with virtually infinite capability to transmit information.
Copper for power wires ? Now we have distributed generation.
The list goes on and on - we will never " run out " of anything - Humans have the ability to modify their behaviour and that's what we do with the pricing mechanism.
South Korea has more alcoholics than any other country, but it seems unlikely to quit the drink any time soon.
https://www.aljazeera.com/indepth/features/2016/02/country-world-worst-…
Pureant - to both your comments, by learning from another culture does not mean you take all parts of that culture. You take the best and most suitable parts to integrate into your own society. It would be worth looking at how they spend money more efficiently than us yet we don’t have to become alcoholics because of it.
Hi Pureant, that’s a big leap from my comment. I musn’t have been clear enough but I’ll try re-say it in a different way. If you look to another culture for improvements you do not have to take their processes/ideas in their entirety. You pick and choose what would be good based on the framework of your culture. I very much dislike unintended consequences so I’m not advocating becoming gdp chasing vultures at all costs I’m merely suggesting we see how South Korea is more efficient with their government spending and if we can replicate it here. This is the true point of diversity, learning from others with different viewpoints.
Let's make it clear, once a government is elected to power in NZ, there is no way to sack them until the next election. We as voters also demonstrate a shocking lack of memory as to the excesses (or failure) of a Government in power, at the ballot box. Under John Keys watch, homelessness reached record, and appalling, proportions, but look how many people still voted for National, to maintain the status quo. I am becoming increasingly concerned that John Key largely sold us out to Chinese money. Helen Clarke dismantled the Mental Health system because she was ideologically opposed to the institutionalisation of the mentally ill. So where are those mentally ill now? In prison, under funded, and being managed by staff who are not trained, or equipped to manage them appropriately. The goal is containment, not treatment. Helen Clark drove and oversaw a number of excesses that have had dire consequences for the country. The housing crisis actually began to ramp up on her watch.
Our political system does not enable constituents much opportunity to hold politicians to account. It would be nice for that to change.
Hi Murray, I think rather than lack of memory it’s more ideologically driven voting combined with poor choices on both sides left and right unfortunately.
For instance, labour got voted out as house prices doubled under their watch only for national to come in and see still dramatically increasing house prices.
"" the proportion of the working-age population on welfare benefits to the 10% figure it has averaged during the last five years"" - that seems a high figure. All societies have a bottom 10% and a small portion of that 10% can loosely be classed as hopeless: drug addicts, prisoners, severe mental health problems but most of it represents good people who find themselves at the bottom of the heap by a mixture of bad luck and below average ability. These are the people who suffer when you have an exceptionally high low wage immigration from countries without a welfare state. In say Switzerland or Norway or Iceland those bottom jobs: cleaners, pump attendants, etc are usually done by citizens not immigrants this means they have dignity and are not dependant on welfare.
""Around 17% at age 15 lack basic numeracy and literacy. "" Surely it depends on definition. The majority of adults simply do not need numeracy. Literacy is essential but it depends on what they define as literacy. Many university professors may have difficulty understanding a text about sport or computer gaming or high fashion or wine tasting; what they do have is adequate literacy to do the background reading to then understand the text if they want to. Much the same applies to say cleaners and labourers - they cannot understand academic text or an article written by an economist but so long as they can read the road signs to get from place to place and the safety warnings on equipment that is all they need.
My guess is 17% (or one in six) indiates the number of 15 year olds who cannot be bothered with school and testing; some will be bright and sadly some are genuinely handicapped for life. There has been raging arguments about education for all the 15 years I've lived in NZ; debates about compulsary Te Reo or Calculus are of little import compared to the small number who leave school unable to read even the simplest sentence. These are the New Zealanders who have very little chance of a future and are likely to end up in prison. I would have successful teachers of remedial reading paid way more than any university professor.
So, I've read all of the above and it's all very interesting, and I've been reading similar stuff for years & years. The kids failing at school, the jails full to the brim, the de-institutionalizing of the mentally challenged, the general degradation of society norms etc. etc. It's all very wordy and it all contains some truths.
However, until parents can actually parent again, and until the kids can be kept under some sort of control again, then the chaos will continue to spread in all directions (as per above) with no chance of ever turning it around.
Not only is the family falling apart and failing on a scale never seen before but we now have laws to back up that collapse in favour of the child and/or single female parent (often a teenager with no clue whatsoever) to attempt to live their out-of-control and often pathetic lives in cold and dangerous houses and neighbourhoods all round the country's poorer areas in an ever declining quality of life. Theirs & ours!
These people are often Maori, very angry at whatever the system tells them to do, totally entitled to anything and everything they want (and now) and are quite capable of turning up to their dysfunctional school and giving the teachers a tune up about what you can't do to my child 'ever' in threatening, intimidating and sometimes violent language. On a regular basis. True.
In other words, the system (education, health, welfare) has no control of the bottom end of our society in any way shape or form that could address the above 'issues' - and those people receiving all these 'services' tell the authorities what they want and how they want it, and "by the way you can't tell me how to live my life so why don't you just fuck off."
So, why you & I are looking at all the stats of all the problems and writing articles to the press etc. the bottom 10% (probably 20%) are now running the cutter for their own interests and pleasures, and you and me can do very little about it without being called racists, or similar language, you know what I mean.
The schools are struggling, the health system is abused daily, the jails are overflowing and the Streets remain unsafe, because they will not be told how to live, nor care how they live.
They just want to be angry at us. And until someone wants to challenge that, it will be so forever. Even worse. I'm sorry.
You have a good argument about the decline of the family and what it costs everyone when there is an irresponsible underclass. But you should be trying to convert readers not just get your grumpiness expressed and I reckon you lose everyone who disagrees with you when you mention Maori. The only time youth crime affected me was when my car was stolen and the youth court had one of the underage culprits write a letter of apology as part of its restorative justice procedure. It was from a 15 year old female Chinese Kiwi. Write about the issue not the ethnicity because 99% of all teenagers of any religious or ethnic group are upright and naively honest and are about to be surprised by the devious and corrupt realities of adult life.
Dear Bryce,
1) Unfetted capitalism (right wing ideology) without regulation leads to a slave labour economy and potential complete breakdown of civil society. Any capitalistic society is inherently always moving in that direction.
2) The electorate in NZ rightly votes for a more balanced system where those that are poorer are supported. Its the price for a civil and ethical society. (However NZ is nowhere as liberal as the Scandinavian countries which redistribute income to a much greater extent and broadly have better social outcomes)
3) We run a monetary system based on price stability. Inherent in that is the requirement that a proportion of the population must be unemployed. As someone with a job its your responsibility to support them so you can have price stability.
4) You have twisted the Productivity Commission's report findings. The PC is arguing more that government spending should go through business case type assessment to ensure spending on various projects within government departments provides socio economic benefits to NZ to improve productivity. The PC is not arguing for the wholesale slashing of government welfare expenditure.
5) There is a lot the government can do also in terms of mapping and understanding its processes and seeking to improve the price, time, quality of those processes, or completely changing a process, to improve productivity.
Small problem: There is no incentive for the Government to do so. It is far easier to change the rules and simply collect more revenue through taxes than have a robust discussion about how money is spent. Telling people that other people have too much is an easier sell than telling them they need to stand on their own two feet a little bit more.
NZTA uses business case processes extensively.
Treasury already has business case processes set up - these can be rolled out across government departments, but yes it requires central government to mandate it.
Local government needs to be forced to do the same.
The incentive is "productivity". Every $ we don't waste is a $ that either doesn't have to be taxed or is spent elsewhere where it provides a higher socio-economic return to NZ.
The electorate will only take so many tax rises (this is the good thing about a democratic society where we see swings from left to right, & hopefully end up generally in the middle somewhere). If Labour et al cant keep its spending controlled / efficient / productive then it will get kicked out of office. There is therefore good incentive.
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