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.
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12th Annual Public Sector Finance Conference
Government Spending
Roger Kerr
18 August 2008
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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%
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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?
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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
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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)
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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
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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)
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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
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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
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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
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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
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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
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