Missing the bigger problem with government spending

This year, the government is spending more of your money than at any time since 1993. Such a statement seems surprising given the cap on government employment that National has had in place over the last three years and the “zero budget” that Bill English made such a big deal of last year. Even more surprising is that if we omit welfare spending, it makes virtually no difference to the picture – government spending excluding welfare, as a percentage of GDP, has not been higher since 1992.

Of course, the government has effectively been forced to spend money over the last two years on finance company bailouts and earthquake-related outlays. But these factors should not distract from the trend that saw government spending, excluding welfare, surge from 18.3% of GDP in 2003 to 23.7% by 2009.

Graph 1

The bloated nature of the government sector is perhaps best demonstrated by employment growth in departmental staff numbers throughout the 2000s. Between June 2000 and June 2009, employment by government departments grew 54%, compared with economy-wide employment growth of 22%. Our table shows that the increases in some of the individual departments are staggering.

Table 1

Two of the biggest growth ministries, education and health, were highlighted in a speech last week by Bill English as being in line for a shake-up. Mr English was particularly referring to the government’s objective to “improve the lives of vulnerable children”, seeking more collaboration between these two departments and the Ministry of Social Development. At this stage, there has been no indication that the changes for these ministries will include funding cuts. But questions must be asked about the effectiveness to date of the massive growth in funding that occurred over the last decade.

Health and education have traditionally been “untouchables” when it comes to government spending. Free and unfettered access to the public healthcare and education systems are virtually seen as a god-given right by New Zealand voters. Partial user pays for healthcare or reduced subsidisation of tertiary education in the first half of the 1990s went down like a cup of cold sick.

The reality is that funding for these sectors is not unlimited. At 6.9% of GDP, last year’s health budget was almost 20% above the previous record reached in the early 1980s. The improved longevity, caused in part by medical advances, has led to increased demand for further medical procedures as people age. Technological advances and increasingly complex procedures come at a cost, and long-term modelling work by Treasury shows that the historic rate of growth in health spending is unsustainable, particularly given the aging population over coming decades.

Graph 2

Education has not shown the same degree of spending increase as health, but as a percentage of GDP, government spending on education still reached a record high in 2010. The aging population means that the education budget is unlikely to blow out in coming decades, but the lack of a longer-term problem should not stop questions from being asked about the appropriate level of spending on education. Even more important is where that spending is being aimed – analysis suggests that spending on young children is more cost-effective at improving socioeconomic outcomes than funding tertiary education.

The reality is that government spending cutbacks are necessary given the overexpansion of the public sector during the last decade. However, it is also true that the government has largely avoided the most politically difficult areas in its quest for savings. Merge departments, which will help reduce the number of back-room jobs in IT and human resources? Check. Rationalise ministries like Foreign Affairs & Trade, which don’t tend to get voters too excited? Check. Slim down the Corrections Department, which was growing rapidly as incarceration rates increased? Check. Address health and superannuation, which pose the two biggest fiscal policy problems over the next 40 years? No way!

Making policy changes in these areas will inevitably carry an element of unpopularity. But unless changes are made, it will only be 15-20 years before New Zealand’s fiscal position will have too much momentum to turn around and debt will threaten to spiral out of control.

This year, National has shown a lot more intent in rationalising government spending than it ever did during its first three years in office. But unless the looming demographic blow-out in certain sectors is taken seriously and started to be addressed, Bill English may as well not bother. Current cutbacks in government spending amount to little more than rearranging the deckchairs on the Titanic compared with the bigger policy changes that need to be enacted.

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