Economist Brian Easton is unconvinced that more public servants necessarily means better performance

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

Much of the Northern Hemisphere thinks we are in the merry month of May. Here it is budget month with much speculation in the lead up to the May 18 announcements and much superficial commentary after, all largely forgotten by June.

For the professional economist the release of the Treasury forecasts are invaluable. The economic forecasts are locked up in mid-April and there may be new data and events which require some modification – it’s the insights into what Treasury is thinking which are important. I assume that there are also invaluable insights for professional political analysts, but they too tend to get lost in the reactions and speculations of the commentariat.

It can be helpful to distance oneself from immediate contemporary concerns by trying to guess what an economic historian in a few decades might think. The budget is likely to be forgotten but the state of the economy will not be. I am guessing that some contemporary concerns will not loom large. So the impact of the Ukraine invasion on the world economy may not be there, although it will loom large in any review of the world’s geopolitics. This assessment might have to be modified by the impact of the switch to war production; it may be of greater magnitude than currently seems likely. But there have been other wars – in Afghanistan and Iraq, say – which did not loom large in economic assessments.

The world war against Covid is almost certainly different. It was a ‘whatever-it-takes’ total effort which seeped into every corner of the world economy – just like the virus. When writing Not in Narrow Seas I was taken by Jack Baker’s assessment in The War Economy (1965) that the economy took ten years to fully adjust after the five-year World War II. I concluded he was right – and the section in NINS is written around Jack’s judgement. If he is right, we must still be unwinding from the Covid Crisis.

The economic dimension of the fight involved heavy government borrowing, often in innovative ways, often with no matching material production (as when it was used to fund wages in closed-down businesses). Somewhere, someone in the system has to pay for that by taking a hit of a reduced level of spending in the future – which has arrived. This is not just a New Zealand issue but an international one. (The international context is often overlooked in budget month.) The offset was that the policies substantially reduced deaths from Covid and gave us time to set up the vaccination roll out. Recall how much human havoc the 1918 influenza virus caused, even though it was nowhere near as virulent a disease.

If I have that right – oh, to be as confident as the commentariat – a major impact has been rising interest rates. My guess is that they may currently be above where they will settle in the long run, which is why some think they are near their peak. (New Zealand may be a little behind the world cycle in this respect.)

Not only are higher interest rates reducing some groups’ incomes but so is consumer inflation. One of the effects – even the purposes – of inflation is to reduce real incomes and wealth. So you would expect inflation after the Covid war if past policies funded incomes without production. The challenge is to prevent the locking in of high inflation expectations.

I shall report on the Treasury interpretation of the state of the economy when it is published. I may have to revise my story.

One issue I do not expect the Treasury to write much about is the size of the public sector (although they may have had numerous informal discussions with the Minister of Finance). Unfortunately the data is all over the place so you can extract whatever story you politically fancy.

What intrigues me about the public debate – Act and National say we are spending too much on the public sector, Labour says about right and that it coming down as a proprtion of total spending, the Greens want more – is the complacency about how well the public service functioning.  The Opposition argues that any failures are the result of poor political leadership. I find that unconvincing, since it was functioning poorly when the Opposition was in power (the Key-English Government). This (Labour) Government concurs with me, explaining that the poor failure was because there was underfunding. So it seems to have spent more (the data is murky).

However, I am unconvinced that more public servants necessarily means better performance. Often adding extra generic managers has failed to add to the government’s responsiveness as distinct from meaningless meetings and reports. The argument in the face of failure that all that is needed is more bureaucrats is unconvincing; the failures have persisted.

This is not to argue that all the public service is failing but, by golly, a lot seems to be. The one that came across my desk the morning I drafted this involved a medical case in which the complainant was given a test which proved positive and then was told that he was not entitled to any followup (I have simplified). So we have put in at least one extra layer in the health system in the form of Health New Zealand (Te Whatu Ora), is acknowledged to be over-staffed, which cannot deal with the simple proposition that if it offers a test, there should be a followup if it proves positive. The expectation is that there will be another example – probably in a quite different area – tomorrow morning, and each morning after. (There was, and there was, and there was ...)

So there seems to be a case that the public service is not fit for purpose, no matter how many or few public servants there are. Is anyone exploring this? Certainly not the State Service Commission which benefits from defending the status quo. Certainly not consultants who depend upon the ineptitude of the public service for their income. I do not see much genuine activity in the universities either; they get rewarded for preparing their students for the current system and from contracts from it.

Such fundamental issues are unlikely to be explored in budget month or through to the election. The Opposition is only interested in personalising any criticism; it is depressing that that is all it seems capable of. The current government did much the same when it was in opposition. That is why it was so unprepared to address the failure when it became government.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.